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Questions tagged [mathematical-finance]

For questions about mathematical problems arising from the study of financial markets.

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29 votes
3 answers
2k views

Are symplectic methods used in (classical) Economics?

The tl;dr question is this: are economists using coordinate-free formulations in studying theory? Borrowing from classical mechanics, the framework I have in mind for classical economics--involving ...
Rogier Swierstra's user avatar
20 votes
10 answers
4k 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 ...
David Harris's user avatar
  • 3,475
16 votes
2 answers
2k 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 mathematical finance, of the three economists who were just awarded this year's Nobel Memorial Prize in ...
epsilon's user avatar
  • 622
12 votes
6 answers
5k views

Discrete version of Ito's lemma

Could anyone give me some references where I could find (a) discrete version(s) of Ito's lemma (b) a proof how it converges to the continuous form in the limit (c) its usage within stochastic ...
vonjd's user avatar
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12 votes
3 answers
2k 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^\...
Aldanor's user avatar
  • 243
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 ...
Anthony Quas's user avatar
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11 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 ...
DoubleJay's user avatar
  • 2,383
10 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 ...
vonjd's user avatar
  • 5,935
8 votes
1 answer
6k 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 ...
vonjd's user avatar
  • 5,935
8 votes
0 answers
304 views

"Meritocratic" pyramid schemes

There have been a couple of times in my life when people from multi-level marketing organizations attempted to recruit me. I listened to what they had to say, and both times I did not get involved ...
Favst's user avatar
  • 2,075
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 - ...
Alexander Chervov's user avatar
6 votes
8 answers
1k views

Reference for elementary and "cool" statistics or financial math

I signed up for a Math Mentorship Program (for high school students) this term, but one of the students assigned to me is more interested in Statistics and Finance - something that would help him to ...
6 votes
1 answer
5k views

Transformation of the Black-Scholes PDE into the diffusion equation - shift of coordinate system

The aim of transforming the Black-Scholes PDE is of course to find a form where an relatively easy solution exists. Most of the steps seem to be straightforward - please use this reference: https://...
vonjd's user avatar
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6 votes
3 answers
4k views

Rigorous definition, detection and test for trending vs. mean-reverting behaviour of stochastic processes

This is a question that has haunted me for some time. In the domain of time series you always talk about trends and mean reversion. But at least to me these concepts are either defined axiomaticly ...
vonjd's user avatar
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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" ...
Alexander Chervov's user avatar
5 votes
1 answer
437 views

Elliptic PDEs in Finance

In mathematical finance, one often encounters parabolic PDEs typically through the Feynman-Kac representation theorem/formula. However, I'm curious are there interesting examples of Elliptic boundary ...
ABIM's user avatar
  • 5,405
5 votes
1 answer
478 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 ...
Federico's user avatar
5 votes
1 answer
287 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 $T$...
user avatar
4 votes
1 answer
426 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}(...
Leitz's user avatar
  • 85
4 votes
2 answers
543 views

maximizing function (stochastic calculus)

S is a price process which follows Geometric Brownian motion with no drift: dS=S*vol*dW, vol=const., W is a Wiener process. Define the following ratio: R=E[Max(f(S)-S(T),0)]/E[f(S)], where S(T) is ...
stilyo's user avatar
  • 41
4 votes
1 answer
3k 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 ...
KaRJ XEN's user avatar
  • 169
4 votes
1 answer
800 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 ...
Halfdan Faber's user avatar
4 votes
0 answers
198 views

Pricing zero coupon bonds through PDE

I'm currently studying Paul Wilmott on quantitative finance and saw an interesting idea for an interest rate model that went unexplored in the book. The idea is to model the market price of risk as a ...
David Hunt's user avatar
3 votes
1 answer
392 views

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....
Ali Taghavi's user avatar
3 votes
2 answers
380 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 \...
Nikolayevich's user avatar
3 votes
2 answers
1k 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) \...
Strickland's user avatar
3 votes
2 answers
919 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^...
Nameless's user avatar
3 votes
3 answers
316 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 ...
David Shor's user avatar
3 votes
1 answer
159 views

Are there any known results on the probability distributions of perpetuities with power law discount rates?

Currently I am working on studying stochastic integrals of the form: $$Z_\infty = \int_0^\infty e^{-f(t)}\mathop{d}S_t$$ where $S_t$ is a Compound-Poisson process with Exponentially-distributed ...
jam jelly's user avatar
3 votes
1 answer
214 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 ...
David Addison's user avatar
3 votes
0 answers
234 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, \...
N.chan's user avatar
  • 39
3 votes
0 answers
171 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 ...
CodeGolf's user avatar
  • 1,835
3 votes
0 answers
518 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 $...
Flavia Barsotti's user avatar
2 votes
3 answers
379 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 ...
Aobara's user avatar
  • 181
2 votes
1 answer
495 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 ...
Heisenberg's user avatar
2 votes
1 answer
461 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 ...
kenneth's user avatar
  • 1,399
2 votes
1 answer
254 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 ...
David Shor's user avatar
2 votes
0 answers
59 views

How to determine speed (rate) in large deviation principle for geometric Brownian motion

By reading Asymptotics for volatility derivatives in multi-factor rough volatility models by Lacombe, Muguruza and Stone, I am not familiar with the way they deduce the speed (or rate) when showing ...
Mili's user avatar
  • 21
2 votes
0 answers
79 views

Convex optimization over compact sets defined as Aumann set-valued integrals

Let $(X,P)$ be a probability measure space. Let $K$ be a convex compact subset of $\mathbb R^d$ and let $F:X \to 2^{K}$ be a set-valued map. Assume that $F$ is: closed (i.e $F(x)$ is closed for ...
dohmatob's user avatar
  • 6,853
2 votes
0 answers
261 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 ...
ght's user avatar
  • 3,626
2 votes
0 answers
263 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 $...
Jerry's user avatar
  • 21
1 vote
2 answers
3k views

Ito's lemma in differential form

Basically you'll find two versions of ito's lemma in the literature: an integral and a differential form. The integral form is based on an Riemann-Stieltjes-integral approach, the differential form is ...
vonjd's user avatar
  • 5,935
1 vote
1 answer
824 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 ...
Pierre's user avatar
  • 278
1 vote
1 answer
22k 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 ...
mtan's user avatar
  • 21
1 vote
3 answers
1k views

Matching dynamic trading strategies with derivatives

The famous Black-Scholes framework is usually derived using a hedging approach where a self-financing portfolio is constructed and the resulting stochastic differential equation is being solved under ...
vonjd's user avatar
  • 5,935
1 vote
1 answer
770 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 ...
sanjay's user avatar
  • 11
1 vote
2 answers
134 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 $...
kenneth's user avatar
  • 1,399
1 vote
2 answers
240 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 ...
user25497's user avatar
1 vote
1 answer
679 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 ...
Aobara's user avatar
  • 181
1 vote
1 answer
1k 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 ...
Joseph O'Rourke's user avatar