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Published / Preprint: Point process bridges and weak convergence of insider trading models. (arXiv:1205.4358v1 [math.PR])

May 22, 2012 by MoneyScience   Comments (0)

We construct explicitly a bridge process whose distribution, in its own filtration, is the same as the difference of two independent Poisson processes with the same intensity and its time 1 value satisfies a specific constraint. This construction allows us to show the existence of Glosten-Milgrom equilibrium and its associated optimal trading strategy for the insider. In the equilibrium the insider employs a mixed strategy to randomly submit two types of orders: one type trades in the same...

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Published / Preprint: Portfolio Selection with Small Transaction Costs and Binding Portfolio Constraints. (arXiv:1205.4588v1 [q-fin.PM])

May 22, 2012 by MoneyScience   Comments (0)

An investor with constant relative risk aversion and an infinite planning horizon trades a risky and a safe asset with constant investment opportunities, in the presence of small transaction costs and a binding exogenous portfolio constraint. We explicitly derive the optimal trading policy, its welfare, and implied trading volume. As an application, we study the problem of selecting a prime broker among alternatives with different lending rates and margin requirements. Moreover, we discuss how...

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Published / Preprint: Structural Hamiltonian of the international trade network. (arXiv:1205.4589v1 [q-fin.GN])

May 22, 2012 by MoneyScience   Comments (0)

It is common wisdom that no nation is an isolated economic island. All nations participate in the global economy and are linked together through trade and finance. Here we analyze international trade network (ITN), being the network of import-export relationships between countries. We show that in each year over the analyzed period of 50 years (since 1950) the network is a typical representative of the ensemble of maximally random networks. Structural Hamiltonians characterizing binary and...

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Published / Preprint: Transaction Costs, Shadow Prices, and Connections to Duality. (arXiv:1205.4643v1 [q-fin.PM])

May 22, 2012 by MoneyScience   Comments (0)

For portfolio choice problems with proportional transaction costs, we discuss whether or not there exists a shadow price, i.e., a least favorable frictionless market extension leading to the same optimal strategy and utility. By means of an explicit counter-example, we show that shadow prices may fail to exist even in seemingly perfectly benign situations, i.e., for a log-investor trading in an arbitrage-free market with bounded prices and constant transaction costs of arbitrary size. We also...

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Published / Preprint: Using Premia and Nsp for Constructing a Risk Management Benchmark for Testing Parallel Architecture. (arXiv:1001.3213v2 [cs.CE] UPDATED)

May 22, 2012 by MoneyScience   Comments (0)

Financial institutions have massive computations to carry out overnight which are very demanding in terms of the consumed CPU. The challenge is to price many different products on a cluster-like architecture. We have used the Premia software to valuate the financial derivatives. In this work, we explain how Premia can be embedded into Nsp, a scientific software like Matlab, to provide a powerful tool to valuate a whole portfolio. Finally, we have integrated an MPI toolbox into Nsp to enable to...

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Published / Preprint: The Effect of Non-Smooth Payoffs on the Penalty Approximation of American Options. (arXiv:1008.0836v2 [q-fin.PR] UPDATED)

May 22, 2012 by MoneyScience   Comments (0)

This article combines various methods of analysis to draw a comprehensive picture of penalty approximations to the value, hedge ratio, and optimal exercise strategy of American options. While convergence of the penalised solution for sufficiently smooth obstacles is well established in the literature, sharp rates of convergence and particularly the effect of gradient discontinuities (i.e. the omni-present `kinks' in option payoffs) on this rate have not been fully analysed so far. This effect...

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