Informs 2015

INFORMS Philadelphia – 2015

348

TD06

06-Room 306, Marriott

Quantitative Finance and Risk Management

Sponsor: Financial Services

Sponsored Session

Chair: Ning Cai, Associate Professor, Hong Kong University of Science

and Technology, Clear Water Bay, Kowloon, Hong Kong, China,

ningcai@ust.hk

1 - Pricing Asian Options under Markov Processes

Ning Cai, Associate Professor, Hong Kong University of Science

and Technology, Clear Water Bay, Kowloon, Hong Kong, China,

ningcai@ust.hk

We derive analytical approximations to both continuous and discrete Asian option

prices under general Markov processes. Numerical results illustrate that our

pricing methods are accurate and fast under diffusion models, jump diffusion

models, and pure jump models.

2 - Transform Methods for Default Timing Problems

Alex Shkolnik, University of California, Berkeley, CA,

United States of America,

ads2@berkeley.edu,

Kay Giesecke

Reduced-form models of name-by-name default timing are widely used to

measure portfolio credit risk. Combinatorial aspects of many default timing

problems render them NP-complete. Nevertheless, well designed transform

methods do yield efficient algorithms. We illustrate such an algorithm on an

application of CDO pricing. The proposed method reduces computational

complexity by orders of magnitude over those encountered in the literature.

A complete error analysis is provided.

3 - Closed-Form Valuation of Barrier Options

Haohong Lin, Department of Industrial Engineering and Logistics

Management, HKUST, Hong Kong, Hong Kong - PRC,

hlinaa@ust.hk

, Ning Cai

We study the pricing problem of barrier options that are among the most popular

exotic options in the financial market and derive closed-form pricing formulas

under some option pricing models. Numerical results suggest that our pricing

method is accurate and efficient.

4 - Does the Prohibition of Trade-throughs Hurt

Liquidity Demanders?

Ningyuan Chen, Columbia University, S. W. Mudd 321, 500 W

120th Street, New York, NY, 10027, United States of America,

nc2462@columbia.edu,

Steven Kou

We study the impact of prohibiting trade-throughs on liquidity demanders. We

find that after trade-throughs are prohibited, the transactions of a liquidity

demander might have higher execution cost and effective spread. However, the

additional cost is insignificant for small trades and stocks with abundant liquidity

provision. Our results favor the enforcement of the Order Protection Rule, as the

cost it incurs on liquidity demanders may be outweighed by its benefit.

TD07

07-Room 307, Marriott

Topics in Optimal Investment

Cluster: Risk Management

Invited Session

Chair: Mykhaylo Shkolnikov, Princeton University, ORFE, Princeton,

NJ, 08540, United States of America,

mshkolni@gmail.com

1 - Arbitrage-free Valuation and Hedging of XVA

Maxim Bichuch, Johns Hopkins University, Baltimore, MD,

United States of America,

mbichuch@jhu.edu,

Agostino Capponi,

Stephan Sturm

We introduce a framework for computing the Total Valuation Adjustment (XVA)

of an European claim accounting for funding costs, counterparty risk, and

collateral mitigation. We derive the nonlinear BSDEs associated with the

replicating portfolios of long and short positions, and define the buyer and seller’s

XVAs. When borrowing and lending rates coincide we provide a fully explicit

expression for the XVA. When they differ, we derive the semi-linear PDEs, and

conduct a numerical analysis.

2 - Rationalizing Behavioral Portfolio Choice

Stephan Sturm, Worcester Polytechnic Institute, Worcester, MA,

United States of America,

ssturm@wpi.edu

, Carole Bernard

Classical portfolio optimization theory postulates that investors’ preferences are

rational and the optimization criterion is expected utility, for some increasing and

concave utility function. This contrasts with with empirical finding of cognitive

psychology. In this talk we try to answer the question if a given behavioral

portfolio choice in a general incomplete semimartingale market can be replicated

in the rational expected utility framework.

3 - Sequential Monte Carlo with Parameter Learning for

Long-memory Processes

Konstantinos Spiliopoulos, Assistant Professor, Boston University,

Department of Mathematics and Statistics, 111 Cummington

Mall, Boston, MA, 02215, United States of America,

kspiliop@math.bu.edu

We consider state-space models specified up to an unknown vector of parameters

and in which the unobserved state process exhibits long-memory. We estimate

both the state process and the parameter vector and propose a sequential Monte

Carlo method that is based on smoothing of the sample points of model

parameters. We establish a central limit theorem for the state and parameter filter.

We apply the approach to S&P 500 data in the context of a stochastic volatility

model with long memory.

4 - Leveraged ETF Portfolios with Delta-vega Control

Zheng Wang, Columbia University, 116th Street, New York, NY,

10027, United States of America,

zw2192@columbia.edu

Tim Leung

We analyze a collection of static portfolio strategies that allow an investor to

control portfolio sensitivity with respect to the short-term return and realized

volatility of a reference asset. This is done by choosing appropriate weights of

each constituent in a portfolio of leveraged ETFs. We backtest our proposed

strategies using empirical data of major equity leveraged ETFs and illustrate the

efficacy of our methodology.

TD08

08-Room 308, Marriott

Tutorial in Financial Services

Sponsor: Financial Services