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  • Stochastic dynamic utilities and intertemporal preferences
    Math. Finan. Econ. (IF 0.792) Pub Date : 2021-01-21
    Marco Maggis, Andrea Maran

    We propose an axiomatic approach which economically underpins the representation of dynamic intertemporal decisions in terms of a utility function, which randomly reacts to the information available to the decision maker throughout time. Our construction is iterative and based on time dependent preference connections, whose characterization is inspired by the original intuition given by Debreu’s State

  • Systemic optimal risk transfer equilibrium
    Math. Finan. Econ. (IF 0.792) Pub Date : 2021-01-19
    Francesca Biagini, Alessandro Doldi, Jean-Pierre Fouque, Marco Frittelli, Thilo Meyer-Brandis

    We propose a novel concept of a Systemic Optimal Risk Transfer Equilibrium (SORTE), which is inspired by the Bühlmann’s classical notion of an Equilibrium Risk Exchange. We provide sufficient general assumptions that guarantee existence, uniqueness, and Pareto optimality of such a SORTE. In both the Bühlmann and the SORTE definition, each agent is behaving rationally by maximizing his/her expected

  • Forward price and fitting of electricity Nord Pool market under regime-switching two-factor model
    Math. Finan. Econ. (IF 0.792) Pub Date : 2021-01-11
    Farshid Mehrdoust, Idin Noorani

    Jump in electricity prices is often due to shock in electricity demand or shock in existing electricity supplies, which can be caused by sudden changes in temperature or production and system failure. Since jumps in electricity dynamics are directly related to the regime switch, we model them via the chain itself and consider a regime switching model for electricity spot price dynamic. Next, we determine

  • Correction to: No-arbitrage commodity option pricing with market manipulation
    Math. Finan. Econ. (IF 0.792) Pub Date : 2021-01-09
    René Aïd, Giorgia Callegaro, Luciano Campi

    The paper [1] contains two mistakes. We are grateful to Man Kit Tsui for his questions and remarks, leading us to identify them.

  • Asymptotics for volatility derivatives in multi-factor rough volatility models
    Math. Finan. Econ. (IF 0.792) Pub Date : 2021-01-09
    Chloe Lacombe, Aitor Muguruza, Henry Stone

    We study the small-time implied volatility smile for Realised Variance options, and investigate the effect of correlation in multi-factor models on the linearity of the smile. We also develop an approximation scheme for the Realised Variance density, allowing fast and accurate pricing of Volatility Swaps. Additionally, we establish small-noise asymptotic behaviour of a general class of VIX options

  • Multiple yield curve modelling with CBI processes
    Math. Finan. Econ. (IF 0.792) Pub Date : 2021-01-09
    Claudio Fontana, Alessandro Gnoatto, Guillaume Szulda

    We develop a modelling framework for multiple yield curves driven by continuous-state branching processes with immigration (CBI processes). Exploiting the self-exciting behavior of CBI jump processes, this approach can reproduce the relevant empirical features of spreads between different interbank rates. In particular, we introduce multi-curve models driven by a flow of tempered alpha-stable CBI processes

  • A financial market with singular drift and no arbitrage
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-11-25
    Nacira Agram, Bernt Øksendal

    We study a financial market where the risky asset is modelled by a geometric Itô-Lévy process, with a singular drift term. This can for example model a situation where the asset price is partially controlled by a company which intervenes when the price is reaching a certain lower barrier. See e.g. Jarrow and Protter (J Bank Finan 29:2803–2820, 2005) for an explanation and discussion of this model in

  • Scale effects in dynamic contracting
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-11-04
    Shirley Bromberg-Silverstein, Santiago Moreno-Bromberg, Guillaume Roger

    We study a continuous-time contracting problem in which project scale plays a role. The agent may speculate to enhance the drift of a cash-flow process; doing so exposes the principal to large, infrequent losses. The optimal contract includes scale as an instrument: downsizing along the equilibrium path is necessary to preserve incentive compatibility. We characterize the optimal contract, and specifically

  • A closed-form pricing formula for European options under a new stochastic volatility model with a stochastic long-term mean
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-10-23
    Xin-Jiang He, Wenting Chen

    Based upon the fact that a constant long-term mean could not provide a good description of the term structure of the implied volatility and variance swap curve, as suggested by Byelkina and Levin (in: Sixth world congress of the Bachelier Finance Society, Toronto, 2010) and Forde and Jacquier (Appl Math Finance 17(3):241–259, 2010), this paper presents a new stochastic volatility model, by assuming

  • Certainty equivalent and utility indifference pricing for incomplete preferences via convex vector optimization
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-10-10
    Birgit Rudloff, Firdevs Ulus

    For incomplete preference relations that are represented by multiple priors and/or multiple—possibly multivariate—utility functions, we define a certainty equivalent as well as the utility indifference price bounds as set-valued functions of the claim. Furthermore, we motivate and introduce the notion of a weak and a strong certainty equivalent. We will show that our definitions contain as special

  • An optimization model for minimizing systemic risk
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-09-12
    Rosella Castellano, Roy Cerqueti, Gian Paolo Clemente, Rosanna Grassi

    This paper proposes an optimal allocation model with the main aim to minimize systemic risk related to the sovereign risk of a set of countries. The reference methodological environment is that of complex networks theory. Specifically, we consider the weighted clustering coefficient as a proxy of systemic risk, while the interconnections among countries are captured by the relationships among default

  • Preferences over rich sets of random variables: on the incompatibility of convexity and semicontinuity in measure
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-09-07
    Alexander Zimper, Hirbod Assa

    This paper considers a decision maker whose preferences are locally upper- or/and lower-semicontinuous in measure. We introduce the notion of a rich set which encompasses any standard vector space of random variables but also much smaller sets containing only random variables with at most two different outcomes in their support. Whenever preferences are complete on a rich set of random variables, lower-

  • Equilibrium effects of intraday order-splitting benchmarks
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-09-04
    Jin Hyuk Choi, Kasper Larsen, Duane J. Seppi

    This paper presents a continuous-time model of intraday trading, pricing, and liquidity with dynamic TWAP and VWAP benchmarks. The model is solved in closed-form for the competitive equilibrium and also for non-price-taking equilibria. The intraday trajectories of TWAP trading targets cause predictable intraday patterns of price pressure, and randomness in VWAP target trajectories induces additional

  • Optimal life-cycle consumption and investment decisions under age-dependent risk preferences
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-07-30
    Andreas Lichtenstern, Pavel V. Shevchenko, Rudi Zagst

    In this article we solve the problem of maximizing the expected utility of future consumption and terminal wealth to determine the optimal pension or life-cycle fund strategy for a cohort of pension fund investors. The setup is strongly related to a DC pension plan where additionally (individual) consumption is taken into account. The consumption rate is subject to a time-varying minimum level and

  • Systemic credit freezes in financial lending networks
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-07-01
    Daron Acemoglu, Asuman Ozdaglar, James Siderius, Alireza Tahbaz-Salehi

    This paper develops a network model of interbank lending, in which banks decide to extend credit to their potential borrowers. Borrowers are subject to shocks that may force them to default on their loans. In contrast to much of the previous literature on financial networks, we focus on how anticipation of future defaults may result in ex ante “credit freezes,” whereby banks refuse to extend credit

  • An integrated model for fire sales and default contagion
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-06-27
    Nils Detering, Thilo Meyer-Brandis, Konstantinos Panagiotou, Daniel Ritter

    Fire sales and default contagion are two of the main drivers of systemic risk in financial networks. While default contagion spreads via direct balance sheet exposures between institutions, fire sales describe iterated distressed selling of assets and their associated decline in price which impacts all institutions invested in these assets. That is, institutions are indirectly linked if they have overlapping

  • Compound Poisson models for weighted networks with applications in finance
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-05-29
    Axel Gandy, Luitgard A. M. Veraart

    We develop a modelling framework for estimating and predicting weighted network data. The edge weights in weighted networks often arise from aggregating some individual relationships between the nodes. Motivated by this, we introduce a modelling framework for weighted networks based on the compound Poisson distribution. To allow for heterogeneity between the nodes, we use a regression approach for

  • Capital allocation rules and acceptance sets
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-07-09
    Gabriele Canna; Francesca Centrone; Emanuela Rosazza Gianin

    This paper introduces a new approach to face capital allocation problems from the perspective of acceptance sets, by defining the family of sub-acceptance sets. We study the relations between the notions of sub-acceptability and acceptability of a risky position as well as their impact on the allocation of risk. We define the notion of risk contribution rule and show how in this context it is interpretable

  • Continuity of utility maximization under weak convergence
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-07-08
    Erhan Bayraktar; Yan Dolinsky; Jia Guo

    In this paper we find tight sufficient conditions for the continuity of the value of the utility maximization problem from terminal wealth with respect to the convergence in distribution of the underlying processes. We also establish a weak convergence result for the terminal wealths of the optimal portfolios. Finally, we apply our results to the computation of the minimal expected shortfall (shortfall

  • Properly discounted asset prices are semimartingales
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-06-11
    Dániel Ágoston Bálint; Martin Schweizer

    We study general undiscounted asset price processes, which are only assumed to be nonnegative, adapted and RCLL (but not a priori semimartingales). Traders are allowed to use simple (piecewise constant) strategies. We prove that under a discounting-invariant condition of absence of arbitrage, the original prices discounted by the value process of any simple strategy with positive wealth must follow

  • Arbitrage-free modeling under Knightian uncertainty
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-06-09
    Matteo Burzoni; Marco Maggis

    We study the Fundamental Theorem of Asset Pricing for a general financial market under Knightian Uncertainty. We adopt a functional analytic approach which requires neither specific assumptions on the class of priors \(\mathcal {P}\) nor on the structure of the state space. Several aspects of modeling under Knightian Uncertainty are considered and analyzed. We show the need for a suitable adaptation

  • Robust time-consistent mean–variance portfolio selection problem with multivariate stochastic volatility
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-06-08
    Tingjin Yan; Bingyan Han; Chi Seng Pun; Hoi Ying Wong

    This paper solves for the robust time-consistent mean–variance portfolio selection problem on multiple risky assets under a principle component stochastic volatility model. The model uncertainty is introduced to the drifts of the risky assets prices and the stochastic eigenvalues of the covariance matrix of asset returns. Using an extended dynamic programming approach, we manage to derive a semi-closed

  • Mean-variance efficiency of optimal power and logarithmic utility portfolios
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-05-29
    Taras Bodnar; Dmytro Ivasiuk; Nestor Parolya; Wolfgang Schmid

    We derive new results related to the portfolio choice problem for power and logarithmic utilities. Assuming that the portfolio returns follow an approximate log-normal distribution, the closed-form expressions of the optimal portfolio weights are obtained for both utility functions. Moreover, we prove that both optimal portfolios belong to the set of mean-variance feasible portfolios and establish

  • Asset pricing in a pure exchange economy with heterogeneous investors
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-05-29
    Xinfeng Ruan; Jin E. Zhang

    In this paper, we provide a complete solution to the problem of equilibrium asset pricing in a pure exchange economy with two types of heterogeneous investors having higher/lower risk aversion. Using a perturbation method, we obtain analytical approximate formulas for the optimal consumption-sharing rule, which is numerically justified to be accurate for a large risk aversion and heterogeneity. We

  • No–arbitrage commodity option pricing with market manipulation
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-04-02
    René Aïd; Giorgia Callegaro; Luciano Campi

    We design three continuous-time models in finite horizon of a commodity price, whose dynamics can be affected by the actions of a representative risk-neutral producer and a representative risk-neutral trader. Depending on the model, the producer can control the drift and/or the volatility of the price whereas the trader can at most affect the volatility. The producer can affect the volatility in two

  • No arbitrage in continuous financial markets
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-03-14
    David Criens

    We derive integral tests for the existence and absence of arbitrage in a financial market with one risky asset which is either modeled as stochastic exponential of an Itô process or a positive diffusion with Markov switching. In particular, we derive conditions for the existence of the minimal martingale measure. We also show that for Markov switching models the minimal martingale measure preserves

  • Consumption and portfolio decisions with uncertain lifetimes
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-03-13
    Shou Chen; Richard Fu; Lei Wedge; Ziran Zou

    We study the consumption and portfolio decisions by incorporating mortality risk and altruistic factor in the classical model of Merton (Rev Econ Stat 51:247–257, 1969; J Econ Theory 3:373–413, 1971) and Yaari (Rev Econ Stud 32(2):137–150, 1965). We find that besides the present-biased preference, the process of updating mortality information may be another underlying cause of dynamically time-inconsistent

  • A generalized stochastic differential utility driven by G -Brownian motion
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-03-12
    Qian Lin; Dejian Tian; Weidong Tian

    This paper introduces a class of generalized stochastic differential utility (GSDU) models in a continuous-time framework to capture ambiguity aversion on the financial market. This class of GSDU models encompasses several classical approaches to ambiguity aversion and includes new models about ambiguity aversion. For a general GSDU model, we demonstrate its continuity, monotonicity, time consistency

  • How safe are central counterparties in credit default swap markets?
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-03-09
    Mark Paddrik, H. Peyton Young

    We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in the credit default swaps market. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures

  • On the dynamic representation of some time-inconsistent risk measures in a Brownian filtration
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-02-24
    Julio Backhoff-Veraguas; Ludovic Tangpi

    It is well-known from the work of Kupper and Schachermayer that most law-invariant risk measures are not time-consistent, and thus do not admit dynamic representations as backward stochastic differential equations. In this work we show that in a Brownian filtration the “Optimized Certainty Equivalent” risk measures of Ben-Tal and Teboulle can be computed through PDE techniques, i.e. dynamically. This

  • Consumption-investment optimization problem in a Lévy financial model with transaction costs and làdlàg strategies
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-02-17
    E. Lepinette; T. Q. Tran

    We consider the consumption-investment optimization problem for the financial market model with constant proportional transaction rates and Lévy price process dynamics. Contrarily to the recent work of De Vallière (Financ Stoch 20:705–740, 2016), portfolio process trajectories are only left and right limited. This allows us to identify an optimal làdlàg strategy, e.g. in the two dimensional case, as

  • Optimal retirement and portfolio selection with consumption ratcheting
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-02-05
    Junkee Jeon; Kyunghyun Park

    The purpose of this paper is to study the optimal retirement and consumption/investment decisions of an infinitely lived agent who does not tolerate any decline in his/her consumption throughout his/her lifetime. The agent receives labor income but suffers disutility from working until retirement. The agent’s optimization problem combines features of both singular control and optimal stopping. We use

  • Von Neumann–Gale dynamics and capital growth in financial markets with frictions
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-21
    Esmaeil Babaei; Igor V. Evstigneev; Klaus Reiner Schenk-Hoppé; Mikhail Zhitlukhin

    The aim of this work is to extend the classical theory of growth-optimal investments (Shannon, Kelly, Breiman, Algoet, Cover and others) to models of asset markets with frictions—transaction costs and portfolio constraints. As the modelling framework, we use discrete-time dynamical systems generated by convex homogeneous multivalued operators in spaces of random vectors—von Neumann–Gale dynamical systems

  • Short maturity conditional Asian options in local volatility models
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-18
    Nian Yao; Zhichao Ling; Jieyu Zhang; Mingqing Xiao

    In this paper, we study the option pricing problem for the conditional Asian option that appears as a recent market product, offering a cheaper and new alternative to the regular Asian option. We develop the new characteristics of short-maturity asymptotic for the prices of the conditional Asian option provided that the underlying asset follows a local volatility model. The asymptotics for out-of-the-money

  • On the firm’s option values of short-time work policies
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-18
    Kuno J. M. Huisman; Jacco J. J. Thijssen

    We analyse the short-time work (STW) regulations that several OECD countries introduced after the 2007 financial crisis. We view these measures as a collection of real options and study the dynamic effect of STW on the endogenous liquidation decision of the firm. While STW delays a firm’s liquidation, it is not necessarily welfare enhancing. Moreover, it turns out that firms use STW too long. We show

  • Game theoretic valuation of deposit insurance under jump risk: from too small to survive to too big to fail
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-10
    Tat Wing Wong

    This study examines the valuation problem in deposit insurance as a game option between the deposit insurer and the insured bank with asymmetric bankruptcy costs. The asset-to-deposit ratio of the insured bank is modeled as an exponential Lévy process with a spectrally negative jump. The study examines a wide range of scenarios in which the optimal closure policies of both parties are fully characterized

  • Many-player games of optimal consumption and investment under relative performance criteria
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-02
    Daniel Lacker; Agathe Soret

    We study a portfolio optimization problem for competitive agents with CRRA utilities and a common finite time horizon. The utility of an agent depends not only on her absolute wealth and consumption but also on her relative wealth and consumption when compared to the averages among the other agents. We derive a closed form solution for the n-player game and the corresponding mean field game. This solution

  • Nash equilibrium strategies and survival portfolio rules in evolutionary models of asset markets
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-01
    Sergei Belkov; Igor V. Evstigneev; Thorsten Hens; Le Xu

    We consider a stochastic model of a financial market with one-period assets and endogenous asset prices. The model was initially developed and analyzed in the context of Evolutionary Finance with the main focus on questions of “survival and extinction” of investment strategies (portfolio rules). In this paper we view the model from a different, game-theoretic, perspective and analyze Nash equilibrium

  • On the probability of default in a market with price clustering and jump risk
    Math. Finan. Econ. (IF 0.792) Pub Date : 2020-01-01
    Shiyu Song; Yongjin Wang; Guangli Xu

    In this paper, we consider the probability of default for financial variables under a tractable stochastic model which can capture both the price clustering phenomenon and the jump risk. We assume that the logarithm of the price dynamics is driven by a so-called sticky double exponential jump diffusion process. In particular, the price clustering is incorporated by time changing the jump diffusion

  • The learning premium
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-11-29
    Maxim Bichuch; Paolo Guasoni

    We find equilibrium stock prices and interest rates in a representative-agent model where dividend growth is uncertain, but gradually revealed by dividends themselves, while asset prices reflect current information and the potential impact of future knowledge. In addition to the usual premium for risk, stock returns include a learning premium, which reflects the expected change in prices from new information

  • Quantile hedging in models with dividends and application to equity-linked life insurance contracts
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-11-25
    Anna Glazyrina; Alexander Melnikov

    The paper demonstrates the effect of the dividends on pricing and hedging the European contingent claims under a budget constraint and presents insurance applications. Explicit formulae for the quantile pricing and hedging of the European call option are derived assuming the jump-diffusion model of the financial market. These results are used to determine the premium of the pure endowment with fixed

  • Dual representations for systemic risk measures
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-11-05
    Çağın Ararat; Birgit Rudloff

    The financial crisis showed the importance of measuring, allocating and regulating systemic risk. Recently, the systemic risk measures that can be decomposed into an aggregation function and a scalar measure of risk, received a lot of attention. In this framework, capital allocations are added after aggregation and can represent bailout costs. More recently, a framework has been introduced, where institutions

  • Managing inventory with proportional transaction costs
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-09-11
    Florent Gallien; Serge Kassibrakis; Semyon Malamud

    We solve the problem of optimal inventory management for a CARA market-maker who faces proportional transaction costs and marking to market. Our model accommodates inventory shocks following an arbitrary compound Poisson process. We show that the no-trading region is always wider in the presence of inventory shocks.

  • Optimal portfolio choice: a minimum expected loss approach
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-09-07
    Andrés Ramírez-Hassan; Rosember Guerra-Urzola

    The mainstream in finance tackles portfolio selection based on a plug-in approach without consideration of the main objective of the inferential situation. We propose minimum expected loss (MELO) estimators for portfolio selection that explicitly consider the trading rule of interest. The asymptotic properties of our MELO proposal are similar to the plug-in approach. Nevertheless, simulation exercises

  • Fractional risk process in insurance
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-06-15
    Arun Kumar; Nikolai Leonenko; Alois Pichler

    The Poisson process suitably models the time of successive events and thus has numerous applications in statistics, in economics, it is also fundamental in queueing theory. Economic applications include trading and nowadays particularly high frequency trading. Of outstanding importance are applications in insurance, where arrival times of successive claims are of vital importance. It turns out, however

  • A regime switching model for temperature modeling and applications to weather derivatives pricing
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-05-16
    Aysun Türkvatan; Azize Hayfavi; Tolga Omay

    In this study, we propose a regime-switching model for temperature dynamics, where the parameters depend on a Markov chain. We improve upon the traditional models by modeling jumps in temperature dynamics via the chain itself. Moreover, we compare the performance of the proposed model with the existing models. The results indicate that the proposed model outperforms in the short time forecast horizon

  • Portfolio choice, portfolio liquidation, and portfolio transition under drift uncertainty
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-04-04
    Alexis Bismuth; Olivier Guéant; Jiang Pu

    This paper presents several models addressing optimal portfolio choice, optimal portfolio liquidation, and optimal portfolio transition issues, in which the expected returns of risky assets are unknown. Our approach is based on a coupling between Bayesian learning and dynamic programming techniques that leads to partial differential equations. It enables to recover the well-known results of Karatzas

  • Golden options in financial mathematics
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-03-13
    Alejandro Balbás; Beatriz Balbás; Raquel Balbás

    This paper deals with the construction of “smooth good deals” (SGD), i.e., sequences of self-financing strategies whose global risk diverges to minus infinity and such that every security in every strategy of the sequence is a “smooth” derivative with a bounded delta. Since delta is bounded, digital options are excluded. In fact, the pay-off of every option in the sequence is continuos (and therefore

  • Consumption–investment problem with pathwise ambiguity under logarithmic utility
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-03-07
    Zongxia Liang; Ming Ma

    For an investor with intertemporal information about risky assets, we propose a set of càdlàg confidence paths to describe his ambiguity about drift, volatility, and jump of the risky assets. For each possible model, the differential characteristic of log-return processes is a stochastic process and almost surely takes value in the set of confidence paths. Under the framework of the robust consumption–investment

  • Irreversible investment with fixed adjustment costs: a stochastic impulse control approach
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-02-28
    Salvatore Federico; Mauro Rosestolato; Elisa Tacconi

    We consider an optimal stochastic impulse control problem over an infinite time horizon motivated by a model of irreversible investment choices with fixed adjustment costs. By employing techniques of viscosity solutions and relying on semiconvexity arguments, we prove that the value function is a classical solution to the associated quasi-variational inequality. This enables us to characterize the

  • Impact of contingent payments on systemic risk in financial networks
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-02-18
    Tathagata Banerjee; Zachary Feinstein

    In this paper we study the implications of contingent payments on the clearing wealth in a network model of financial contagion. We consider an extension of the Eisenberg–Noe financial contagion model in which the nominal interbank obligations depend on the wealth of the firms in the network. We first consider the problem in a static framework and develop conditions for existence and uniqueness of

  • Mean-reverting additive energy forward curves in a Heath–Jarrow–Morton framework
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-02-13
    Fred Espen Benth; Marco Piccirilli; Tiziano Vargiolu

    In this paper, we make the traditional modeling approach of energy commodity forwards consistent with no-arbitrage. In fact, traditionally energy prices are modeled as mean-reverting processes under the real-world probability measure \(\mathbb {P}\), which is in apparent contradiction with the fact that they should be martingales under a risk-neutral measure \(\mathbb {Q}\). The key point here is that

  • A macroscopic portfolio model: from rational agents to bounded rationality
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-01-29
    Torsten Trimborn

    We introduce a microscopic model of interacting financial agents, where each agent is characterized by two portfolios; money invested in bonds and money invested in stocks. Furthermore, each agent is faced with an optimization problem in order to determine the optimal asset allocation. Thus, we consider a differential game since all agents aim to invest optimal and we introduce the concept of Nash

  • A switching microstructure model for stock prices
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-01-08
    Donatien Hainaut; Stephane Goutte

    This article proposes a microstructure model for stock prices in which parameters are modulated by a Markov chain determining the market behaviour. In this approach, called the switching microstructure model (SMM), the stock price is the result of the balance between the supply and the demand for shares. The arrivals of bid and ask orders are represented by two mutually- and self-excited processes

  • Bubbles in assets with finite life
    Math. Finan. Econ. (IF 0.792) Pub Date : 2019-01-01
    Henri Berestycki; Cameron Bruggeman; Regis Monneau; José A. Scheinkman

    We study the speculative value of a finitely lived asset when investors disagree and short sales are limited. In this case, investors are willing to pay a speculative value for the resale option they obtain when they acquire the asset. Using martingale arguments, we characterize the equilibrium speculative value as a solution to a fixed point problem for a monotone operator \(\mathbb F\). A Dynamic

  • Constrained portfolio-consumption strategies with uncertain parameters and borrowing costs
    Math. Finan. Econ. (IF 0.792) Pub Date : 2018-12-26
    Zhou Yang; Gechun Liang; Chao Zhou

    This paper studies the properties of the optimal portfolio-consumption strategies in a finite horizon robust utility maximization framework with different borrowing and lending rates. In particular, we allow for constraints on both investment and consumption strategies, and model uncertainty on both drift and volatility. With the help of explicit solutions, we quantify the impacts of uncertain market

  • How local in time is the no-arbitrage property under capital gains taxes?
    Math. Finan. Econ. (IF 0.792) Pub Date : 2018-10-11
    Christoph Kühn

    In frictionless financial markets, no-arbitrage is a local property in time. This means that a discrete time model is arbitrage-free if and only if there does not exist a one-period-arbitrage. With capital gains taxes, this equivalence fails. For a model with a linear tax and one non-shortable risky stock, we introduce the concept of robust local no-arbitrage (RLNA) as the weakest local condition which

  • Characterizations of risk aversion in cumulative prospect theory
    Math. Finan. Econ. (IF 0.792) Pub Date : 2018-10-05
    Tiantian Mao; Fan Yang

    In this paper, we investigate the necessary and sufficient conditions for a decision maker to be monotone risk averse and left-monotone risk averse, respectively, in cumulative prospect theory (CPT). Our results show that the decision maker is more pessimistic than greedy if she is either monotone or left-monotone risk averse, which is similar to that of Chateauneuf et al. (Econ Theory 25(3):649–667

  • Increasing risk aversion and life-cycle investing
    Math. Finan. Econ. (IF 0.792) Pub Date : 2018-09-18
    Kerry Back; Ruomeng Liu; Alberto Teguia

    We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant relative risk aversion that it implies an unreasonably large aversion to large gambles, given reasonable aversion to small gambles. The model provides theoretical support for the common recommendation

  • Optimal investment with random endowments and transaction costs: duality theory and shadow prices
    Math. Finan. Econ. (IF 0.792) Pub Date : 2018-09-01
    Erhan Bayraktar; Xiang Yu

    This paper studies the utility maximization on the terminal wealth with random endowments and proportional transaction costs. To deal with unbounded random payoffs from some illiquid claims, we propose to work with the acceptable portfolios defined via the consistent price system such that the liquidation value processes stay above some stochastic thresholds. In the market consisting of one riskless

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