# Questions tagged [mathematical-finance]

The mathematical-finance tag has no usage guidance.

58
questions

**-5**

votes

**0**answers

24 views

### Tradeoff debt/equity Financial Problem [closed]

I am an MBA student and I'm having a hard time solving this issue, can someone please try and advise? that would be really really helpful!
Consider a firm that has 5M dollars in cash, and a face-value ...

**2**

votes

**1**answer

182 views

### Stochastic integral with respect to a random field

I came across a generalized Black-Scholes equation formulation in this paper.
Let me highlight the basic idea below. Consider a random field $W(t,T)$ where for a fixed $T$, $W$ is a Brownian motion ...

**0**

votes

**0**answers

43 views

### Construction of equivalent local martingale measures

Assuming No Free Lunch with Vanishing Risk (NFLVR), the market $(\Omega, \mathcal F, \mathbb P, S)$ admits a measure $\mathbb Q$ equivalent to $\mathbb P$ such that $S$ is a $\mathbb Q$-local ...

**1**

vote

**0**answers

28 views

### Applications of Kazamaki Conditions

I'm interested in applications of this theorem by Sekiguchi Kazamaki:
"Continuous Exponential Martingales and BMO" - Theorem 1.12:
Let $M$ be a continuous local martingale and $Z(M):= \exp(M-\frac{1}{...

**-4**

votes

**1**answer

228 views

### Reference request in optimal stopping [closed]

I am given the following task. Distributed over a trading day, I am supposed to buy a certain quantity of a good. The price of this good changes during the day. The goal is to buy the required ...

**1**

vote

**0**answers

67 views

### Non-diagonalizable matrix in a discretized Ornstein-Uhlenbeck process

I am attempting to implement a pairs trading algorithm for two securities by approximating a discretized version of the Ornstein-Uhlenbeck process:
\begin{equation*}
d\mathbf{S}_t = \mathbf{\kappa}(\...

**1**

vote

**0**answers

59 views

### Recovering a Log-Correlated Gaussian Field from a limit-lognormal singular measure

In a paper I (didn't write, but) co-authored, Forecasting Volatility with the Multifractal Random Walk Model, we use explicit formulas that give the law of $(X(t),t>0)$ conditional on $(X(t),t<0)...

**1**

vote

**0**answers

144 views

### Unique EMM & completeness in the Black-Scholes model

Consider the Black-Scholes model
$$ dS(t) = \mu(t) S(t) dt + \sigma(t) S(t) dW^{\mathbb{P}}(t) $$
$$ dB(t) = r(t) B(t) dt$$
Steele shows now in "Stochastic Calculus & Financial Applications" (Ch. ...

**3**

votes

**1**answer

201 views

### Inverting the cumulative probability function to find roots of stochastic function

Given a function:
$$f[x]=a\, \Phi \left[-x+\sigma \sqrt{\tau}\right]-\left(b+c\, e^{-d \tau}\right)\Phi \left[-x\right]$$
where $\Phi$ is the cumulative density function of the standard normal ...

**3**

votes

**2**answers

233 views

### Large deviation bound for O-U process

Assume $X_t$ is an Ornstein-Uhlenbeck process in the form of
$$
d X_t = -\alpha X_t dt + \sigma dB_t
$$
Is there an exponential bound (large-deviation bound) for
$$
P\left(
\max_{t\le T} |X_t| \ge z
\...

**1**

vote

**0**answers

72 views

### Extending risk neutral measure to insurance/mortality filtration

In insurance mathematics, one often models the underlying of an insurance policy with a Black Scholes model on a filtered probability space $(\Omega,\mathbb{Q},\mathcal{F},\mathbb{F}=(\mathcal{F}_{t}))...

**0**

votes

**1**answer

108 views

### Is it possible to solve $P = Cny^{-1}(1-1/(1+y/n)^{nT}) + M/(1+y/n)^{nT}$ for $y$? [closed]

The equation
$$
P = \frac{Cn}{y}\left(1-\frac{1}{(1+\frac{y}{n})^{nT}}\right)+\frac{M}{(1+\frac{y}{n})^{nT}}
$$
represents the present value (price $P$) of a government bond which pays $C$ ...

**3**

votes

**2**answers

604 views

### Is the “hybrid” Black-Scholes Hull-White model arbitrage free?

Given a "hybrid" Black-Scholes Hull White (BSHW) model. That is, the stock price is modelled by a Black Scholes SDE:
\begin{equation} dS(t) = \mu(t)S(t)dt + \sigma_{S}(t)S(t)dW^{\mathbb{P}}_{S}(t)
\...

**1**

vote

**1**answer

653 views

### Beginning books on stochastic calculus and finance [closed]

my background is mathematics i would like to do research in financial mathematics. So I read some part of wilmott's book but it required stochastic calculus. I did not understand that book. So which ...

**2**

votes

**3**answers

288 views

### Compute inverse series for implicit equation $b=-\log(1-e^{-x})/x$

In financial mathematics, the inverse series of: $$b(x) = -\frac{\log(1-e^{-x})}{x}$$ is needed in order to perform fast calculation on swaptions for G2++ calibration model. (see this post for ...

**1**

vote

**1**answer

475 views

### Taylor Series expansion for an implicitely defined family of functions

Can we find a Taylor Series expansion for $y(x)$ implicitly defined by:
$$\sum _{i=1}^nA_ie^{a_ix+b_iy} = 1 ?$$
In financial mathematics, the two-additive-factors Model G2++ is commonly used for ...

**2**

votes

**1**answer

351 views

+50

### A particular Lie algebra $L_{n}$ and (various) lie groups whose Lie algebra is isomorphic to $L_{n}$

Edit: According to the comment by @LSpice we realise the existing link to the main motivation of the question is not available. Then we search for the paper we found the following version:
https://www....

**3**

votes

**0**answers

209 views

### European call option pricing under mean reverting stock return

Consider the stock price process satisfies the following SDE:
$dS_t=\mu_t S_tdt + \sigma S_t dW_t , S_0=s $
and the mean return $\mu_t$ satisfies the following SDE:
$d\mu_t=(a-\mu_t)dt +dB_t, \...

**2**

votes

**1**answer

313 views

### Is it safe to work on a Cadlag modification of a Feller process?

Let $f$ be a continuous bounded function.
$X$ is a Feller process, and $\hat X$ is its Cadlag modification. By the definition of the modification, one can write
$$\mathbb E[f(X_t)] = \mathbb E[f(\hat ...

**1**

vote

**2**answers

113 views

### Is zero a regular point for a drifted $\alpha$-stable process?

We consider 1-d process of the form $Y_{t} = bt + M_{t}^{\alpha}$,
where $M_{t}^{\alpha}$ is $\alpha$-stable process for some $\alpha
\in (0,2)$ with its levy symbol $\eta(u) = - |u|^{\alpha}.$,
and $...

**-2**

votes

**1**answer

213 views

### About the boundary conditions of the Black-Scholes-Merton PDE [closed]

I have a question about the solution of the Black-Scholes PDE for the European call option when I read the book Stochastic Calculus for Finance II of Steven E.Shreve.
Let $c(t,x)$ be the value of the ...

**2**

votes

**0**answers

205 views

### Asymptotics of Variable Drift Ornstein–Uhlenbeck Process

The Ornstein–Uhlenbeck process is defined as the stochastic process that solves the following SDE:
$dx_t = \theta (\mu-x_t)\,dt + \sigma\, dW_t$
where $\theta>0$, $\mu$ and $\sigma>0$ are ...

**1**

vote

**0**answers

74 views

### The Stratonovich formulation of the Double Mean Reverting Model

I am writing my Bachelor's Thesis on the fast Ninomiya-Victoir calibration of the Double Mean Reverting model and have a question to its Stratonovich formulation. I am new to mathoverflow and a novice ...

**4**

votes

**1**answer

2k views

### Algebraic Number Theory in Financial Mathematics

I am currently doing my masters studies in financial mathematics. However, I have had a good background in number theory and I don't feel like leaving it just like that. I am thus inquiring on any ...

**2**

votes

**1**answer

833 views

### The Stock Market Polytope: Explanation?

Ovidiu Racorean.
"Crossing Stocks and the Positive Grassmannian I: The Geometry behind Stock
Market."
(arXiv Abstract link)
Anyone care to offer a summary of what's going on here?
(The ...

**4**

votes

**0**answers

162 views

### compactness of a probability set

I have a question about the compactness of a set of martingale measures. Let $\Omega=\mathcal{C}[0,1]$ be the space of continuous functions on $[0,1]$ and $\mathcal{M}_{\Omega}$ be the family of ...

**17**

votes

**2**answers

1k views

### On mathematical aspects of the most recent Nobel prize in economics winners' work

Can somebody briefly introduce the mathematical aspects, in particular, those related to math finance, of the three economists who were just awarded this year's Nobel Memorial Prize in Economic ...

**0**

votes

**1**answer

140 views

### Ratios of random variables with weak moment condition

Let $X_n$ be a sequence of iid positive random variables. Assume that $X_n$ has finite $\alpha$th moment for some value $\alpha \in (0,1)$, but infinite first moment. Assume also that the reciprocal $...

**2**

votes

**0**answers

239 views

### A strange Weakly Compactness in $L^1 ( \Omega, \mathcal{F}, \mathbb{P})$

Hi to everyone,
The ingredients of my problem are the following:
I have a probability space $(\Omega, \mathcal{F}, \mathbb{P})$, a set (continuum cardinality) $\mathcal{Q}$ of probability measures on $...

**5**

votes

**3**answers

1k views

### One can earn nothing on the Brownian motion, true ?

Consider any discrete time stochastic process $p(n)$ (price) with independent increments $\xi_k$ and $E(\xi_k)=0$. E.g. Brownian motion (i.e. $\xi_k = N(0,1)$).
Consider some "trading strategy" ...

**7**

votes

**3**answers

1k views

### How much one can earn on a white noise ?

Consider the simplfied math. model for asset price (it is nevertheless quite practical for specific situations see "PS" part below) assume price "p(n)" at moment "n" is equal to N(0,1) - i.i.d - ...

**0**

votes

**1**answer

451 views

### Mathematical properties of financial prices

Prices of financial assets (stock-market prices or currency exchange rates) obviously resemble trajectories of stochastic processes.
What is known about their mathematical properties ?
I know ...

**12**

votes

**0**answers

1k views

### American put option pricing by “binomial trees”

I'm teaching a financial mathematics course and have found a fascinating (to me) numerical phenomenon and wonder if anyone has studied it, or knows anything similar.
I'll try and give a description ...

**4**

votes

**1**answer

360 views

### Trajectorial version of Doob's $L^2$ inequality

In the paper http://www.mat.univie.ac.at/~schachermayer/pubs/preprnts/prpr0154.pdf
you can find a trajectorial version of Doob's inequality. It is given by:
$$\bar{s}^2_T+4\sum_{k=0}^{T-1}\bar{s_k}(...

**1**

vote

**1**answer

606 views

### Solving an Ornstein-Uhlenbeck-like SDE $y(t,T)=H_t + \mathbb{E}[\int_t^T y(s-,T)dX_s|\mathcal{F}_t]$

I have asked a similar question involving some finance background some time ago here math.stackexchange, however no really good answer came up. I was able to find a solution at least for a special ...

**1**

vote

**2**answers

215 views

### market completion in stochastic volatility model

Hi all,
Consider a stochastic volatility model. As there are two sources of risk and one asset only, this is an imcomplete market. One can complete the market by considering a derivative V1 used to ...

**1**

vote

**0**answers

127 views

### stochastic volatility valuation equation

I'm trying to derive the valuation equation under a general stochastic volatility model. What one can read in the litterature is the following reasonning:
One consider a replicating self-financing ...

**5**

votes

**1**answer

266 views

### Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative [closed]

Let $X_t$ be an american style financial derivative with random exercise time $T$
where $t$ and $T$ belongs to some finite set $A$.
Buying this derivative requires the buyer to pay $p_t$ up to time $T$...

**11**

votes

**3**answers

1k views

### Compactness of the set of densities of equivalent martingale measures

Consider an incomplete market $(\Omega,\mathcal F,\mathbb P)$ driven by a semimartingale $S=(S_t)_{t\in[0,T]}$. Under the no free lunch under vanishing risk (NFLVR) assumption, the set $\mathcal P^\...

**10**

votes

**10**answers

1k views

### Is there any straightforward way to substitute for Gaussian/Brownian assumptions in financial mathematics?

A huge amount of financial mathematics assumes Gaussian distributions of risks and Brownian movement of prices. What efforts have there been to replace these with heavy-tailed distributions? For ...

**3**

votes

**0**answers

495 views

### Laplace transform of a stopping time for stochastic volatility models

Let $V_t$ be a solution of the SDE
$$dV_t=V_t(rdt+\sigma_t dW_t) $$
where $\sigma_t$ satisfies some other SDE
$$d\sigma_t=\alpha(t,\sigma_t)dt+\beta(t,\sigma_t)dW^{\\ \prime}_t $$
and $W_t$ and $...

**19**

votes

**10**answers

3k views

### Expected value as decision criterion in the context of rare events

I have often seen discussions of what actions to take in the context of rare events in terms of expected value. For example, if a lottery has a 1 in 100 million chance of winning, and delivers a ...

**5**

votes

**1**answer

396 views

### Stieltjes integrals of predictable processes

I am looking for a direct proof of the fact that, roughly speaking, if $S=S_0+A+M$ is an $L^2$ semimartingale, and $M$ (the martingale part) has the martingale representation property, then for any ...

**3**

votes

**2**answers

735 views

### Characteristic operator

Let $X_t\in\mathbb{R}$ be an Ito diffusion process given by $$ dX_t=a(b-X_t)dt+\sigma dW_t$$, then the characteristic operator of $X_t$ is given by $$L=a(b-x)\frac{\partial}{\partial x}+\frac{\sigma^...

**4**

votes

**1**answer

775 views

### Responses from mathematicians concerning Flash trading [closed]

Have there been any responses from the mathematics community regarding flash trading, for example from a game theory or system dynamics point of view? Please answer with personal comments or ...

**1**

vote

**1**answer

20k views

### Covariance and standard deviation relationship

I would like to know if an increase in the covariance between two variables would imply that the standard deviation for one of the variables has increased?
This is assuming that the standard ...

**8**

votes

**1**answer

4k views

### Big picture concerning Ito integral, Stratonovich integral and standard results in probability theory

I am confused and don't get the big picture concerning the connection between
Ito integral
Stratonovich integral
Standard results in probability theory concerning skewed distributions.
Example: Take ...

**2**

votes

**1**answer

242 views

### Brownian Bridge under observational error

Suppose that $Z_t$ follows a simple discrete random walk $Z_t=Z_{t-1}+e_t$ , where $e_t$ are a bunch of uncorrelated normal variables with arbitrary variance sigma^2, and that there are observations ...

**3**

votes

**3**answers

270 views

### Finding a distribution family that is preserved under mixture.

Consider the following
$f_{t+1}(z)=p_{12} f_{t}(z/A)+ p_{21} f_{t}(z/B)+p_{22} f_{t}(z/(A+B))$, where $A$, $B$, and the $p$'s are constants and $f_t$ is a probability distribution. Are there any nice ...

**9**

votes

**2**answers

3k views

### Convergence and non-convergence of left-point and mid-point Riemann sums

In standard calculus it is a well known fact that left-point and mid-point Riemann sums do become equal in the limit. When it comes to stochastic integration this is no longer the case. Taking the ...