Annual Research Report 2012 Foreword 3

Total Page:16

File Type:pdf, Size:1020Kb

Annual Research Report 2012 Foreword 3 IntelligentIntelligent solutions solutions for for complex complex problems problems AnnualAnnual Research Research Report Report 2012 2012 2 Cover figure: Simulated temperature distribution for an organic semiconductor device. A strong temperature rise is observed along the edges. Edited by Weierstraß-Institut für Angewandte Analysis und Stochastik (WIAS) Leibniz-Institut im Forschungsverbund Berlin e. V. Mohrenstraße 39 D – 10117 Berlin Germany ISSN 1437-7489 Berlin 2012 Fax: + 49 30 20372 303 E-Mail: [email protected] World Wide Web: http://www.wias-berlin.de/ Annual Research Report 2012 Foreword 3 The Weierstrass Institute for Applied Analysis and Stochastics, Leibniz Institute in Forschungsver- bund Berlin e.V. (WIAS, member of the Leibniz Association), presents its Annual Report 2012. It gives a general overview of the scientific life, as well as an account of the scientific progress made in 2012. Following a more general introduction in part one, in its second part five selected scien- tific contributions, written for a broader public, highlight some results of outstanding importance. Finally, the third part presents the essential results of the research groups. Special attention was again devoted to the proper functioning of the IMU Secretariat. The eager staff of the IMU Secretariat, headed by the WIAS Deputy Director and IMU Treasurer Prof. Dr. Alexan- der Mielke, continued their work, serving mathematics and mathematicians all over the world. Meanwhile, only two years after its official opening in February 2011, the IMU Secretariat at WIAS has become a well-known and well-accepted meeting point of the worldwide mathematical com- munity, which has increased the international visibility of WIAS tremendously. In November 2012, the IMU Office Committee, whose responsibility is to monitor the performance of the IMU Secre- tariat and to report to the IMU Executive Committee, made its first visit to the secretariat. In a Prof. Dr. Jürgen Sprekels, two-day workshop, the staff of the secretariat informed the Office Committee in detail about the Director IMU Secretariat “business”. All this is only possible through the generous financial support provided by the Federal Ministry of Education and Research (BMBF) and the Berlin Senate Department for Economy, Technology and Research; WIAS is very grateful that these two governmental institutions agreed to support the IMU Secretariat financially at equal parts. The main scientific highlight of the year 2011, the “mega-grant” (approximately 3.4 million Euros) of the Russian government for Prof. Dr. Vladimir Spokoiny, Head of the Research Group “Stochastic Algorithms and Nonparametric Statistics”, became fully operative in 2012. Prof. Spokoiny estab- lished a research team with focus on “Predictive Modelling” in the field of information technolo- gies at the renowned Moscow Institute of Physics and Technology, which closely cooperates with his research group at WIAS. Another highlight of 2012 was the foundation of the Leibniz Group “Mathematical Models for Lithium-ion Batteries”, which resulted from the success of the Head of the Research Group “Ther- modynamic Modeling and Analysis of Phase Transitions”, Prof. Dr. Wolfgang Dreyer, in the com- petition of the Leibniz Association in the framework of the “Joint Initiative for Research and Inno- vation”. This group will strongly influence the institute’s future efforts in the field of renewable energies. A further temporary structural change in the institute became effective in the beginning of 2012 when the Young Scientists’ Group “Modeling of Damage Processes” under the leadership of Dr. Dorothee Knees and Dr. Christiane Kraus, which was founded following a recommendation of the institute’s Scientific Advisory Board, took up its work. The above group was founded as a measure of WIAS to promote women in leadership positions. The institute is committed to the implementation of the legally binding German policies and stan- dards to achieve the goal of gender equality. A “Plan of action on gender equality for the years 2012–2015” was developed, and a contract was signed to apply for the “audit berufundfamilie” Annual Research Report 2012 4 Foreword (audit job and family) seal of quality in 2013. WIAS also committed itself to implement the cascade model of the Leibniz Association and of the Joint Science Conference (GWK). Besides these important events of the year 2012, WIAS continued its scientific work, further con- solidating its leading position in the mathematical community as a center of excellence in the treatment of complex applied problems. Several scientific breakthroughs were achieved, some of which will be detailed later in this report, and WIAS has further expanded its scope into new applied problems from medicine, economy, science, and engineering, especially in its main appli- cation areas: Nano- and optoelectronics Optimization and control of technological processes Phase transitions and multifunctional materials Flow and transport processes in continua Conversion, storage, and distribution of energy Random phenomena in nature and economy Besides the international workshops organized by the institute, the number of invited lectures held by WIAS members at international meetings and research institutions, and the many renowned foreign visitors hosted by the institute, last year’s positive development is best reflected by the acquisition of grants: altogether, 42 additional co-workers (+ 9 outside WIAS; Dec. 31, 2012) could be financed from grants. Thirteen international workshops organized by WIAS evidenced the institute’s reputation and its role as an attractive meeting place for international scientific exchange and cooperation. In addi- tion, WIAS members (co-)organized numerous scientific meetings throughout the world. In addition to these “global” activities, on the “local” scale WIAS has intensified its well-establish- ed cooperation with the other mathematical institutions in Berlin, with the main attention directed toward the three Berlin universities. A cornerstone of this cooperation is the fact that in 2012, altogether six leading members of WIAS, including the director and his deputy, held WIAS-funded special chairs at the Berlin universities. The highlight of cooperation with the mathematical institutions in Berlin was also in 2012 the joint operation of the DFG Research Center MATHEON “Mathematics for key technologies” located at the Technische Universität Berlin. The DFG funding of MATHEON continues for a third period until May 2014. Until then, DFG funds exceeding 5.5 million Euros per year continue to flow into Berlin for MATHEON to be an international beacon of applied mathematics. WIAS is committed to the success of the center by providing considerable financial and personal resources: the deputy director of WIAS, Prof. Dr. Alexander Mielke, and Dr. Dorothee Knees are members of MATHEON’s Executive Board, Prof. Dr. Barbara Wagner is deputy chair of the MATHEON Council, and several members of WIAS serve as Scientists in Charge of the center’s mathematical fields or application areas. Be- sides, WIAS members participated in the management of 16 of its subprojects. In turn, on Dec. 31, 2012, 15 scientific collaborators and several student assistants employed at WIAS were funded by MATHEON. Annual Research Report 2012 Foreword 5 In the acquisition of large-scale funds, Berlin’s mathematical community has scored another big success. The joint proposal of the three Berlin universities for an “Einstein Center for Mathematics (ECMath)” was positively evaluated. As a result, the ECMath will start operations in the beginning of 2013, funded by the Einstein Foundation Berlin. WIAS will be strongly involved, both scientifi- cally and financially. Another continuing success story for the mathematical community of Berlin is the “Berlin Mathe- matical School” (BMS), which was extended until 2017 in the framework of the German “Exzellenz- initiative 2012” (competition for excellence). The BMS is a graduate school for advanced math- ematical studies that brings together the capacities of all mathematical institutions in Berlin to attract excellent doctoral students from all over the world. Also in this application, members of WIAS took part as principal investigators, and many members of WIAS serve in the BMS, teaching courses and supervising doctoral students. Presently, the BMS hosts about two hundred students. Besides these major activities, and besides the cooperation with the universities through the man- ifold teaching activities of its members, WIAS initiated and participated in successful applications for Collaborative Research Centers, Priority Programs, and Research Training Groups of the German Research Foundation (DFG). Our primary aim remains unchanged: to combine fundamental research with application-oriented research, and to contribute to the advancement of innovative technologies through new scientific insights. The recent achievements give evidence that this concept, in combination with hard, con- tinuing work on scientific details, eventually leads to success. We hope that funding agencies, colleagues, and partners from industry, economy, and sciences will find this report informative and will be encouraged to cooperate with us. Berlin, in February 2013 J. Sprekels Annual Research Report 2012 6 Scientific Advisory Board Chairperson: Prof. Dr. B. Wohlmuth Technische Universität München, Faculty of Mathematics Chair of Numerical Mathematics – M2 Boltzmannstrasse 3, 85748 Garching Vice-Chairperson: Prof. DI. Dr. K. Kunisch
Recommended publications
  • Numerical Solution of Jump-Diffusion LIBOR Market Models
    Finance Stochast. 7, 1–27 (2003) c Springer-Verlag 2003 Numerical solution of jump-diffusion LIBOR market models Paul Glasserman1, Nicolas Merener2 1 403 Uris Hall, Graduate School of Business, Columbia University, New York, NY 10027, USA (e-mail: [email protected]) 2 Department of Applied Physics and Applied Mathematics, Columbia University, New York, NY 10027, USA (e-mail: [email protected]) Abstract. This paper develops, analyzes, and tests computational procedures for the numerical solution of LIBOR market models with jumps. We consider, in par- ticular, a class of models in which jumps are driven by marked point processes with intensities that depend on the LIBOR rates themselves. While this formulation of- fers some attractive modeling features, it presents a challenge for computational work. As a first step, we therefore show how to reformulate a term structure model driven by marked point processes with suitably bounded state-dependent intensities into one driven by a Poisson random measure. This facilitates the development of discretization schemes because the Poisson random measure can be simulated with- out discretization error. Jumps in LIBOR rates are then thinned from the Poisson random measure using state-dependent thinning probabilities. Because of discon- tinuities inherent to the thinning process, this procedure falls outside the scope of existing convergence results; we provide some theoretical support for our method through a result establishing first and second order convergence of schemes that accommodates thinning but imposes stronger conditions on other problem data. The bias and computational efficiency of various schemes are compared through numerical experiments. Key words: Interest rate models, Monte Carlo simulation, market models, marked point processes JEL Classification: G13, E43 Mathematics Subject Classification (1991): 60G55, 60J75, 65C05, 90A09 The authors thank Professor Steve Kou for helpful comments and discussions.
    [Show full text]
  • CURRICULUM VITAE Anatoliy SWISHCHUK Department Of
    CURRICULUM VITAE Anatoliy SWISHCHUK Department of Mathematics & Statistics, University of Calgary 2500 University Drive NW, Calgary, Alberta, Canada T2N 1N4 Office: MS552 E-mails: [email protected] Tel: +1 (403) 220-3274 (office) home page: http://www.math.ucalgary.ca/~aswish/ Education: • Doctor of Phys. & Math. Sci. (1992, Doctorate, Institute of Mathematics, National Academy of Sciences of Ukraine (NASU), Kiev, Ukraine) • Ph.D. (1984, Institute of Mathematics, NASU, Kiev, Ukraine) • M.Sc., B.Sc. (1974-1979, Kiev State University, Faculty of Mathematics & Mechanics, Probability Theory & Mathematical Statistics Department, Kiev, Ukraine) Work Experience: • Full Professor, Department of Mathematics and Statistics, University of Calgary, Calgary, Canada (April 2012-present) • Co-Director, Mathematical and Computational Finance Laboratory, Department of Math- ematics and Statistics, University of Calgary, Calgary, Canada (October 2004-present) • Associate Professor, Department of Mathematics and Statistics, University of Calgary, Calgary, Canada (July 2006-March 2012) • Assistant Professor, Department of Mathematics and Statistics, University of Calgary, Calgary, Canada (August 2004-June 2006) • Course Director, Department of Mathematics & Statistics, York University, Toronto, ON, Canada (January 2003-June 2004) • Research Associate, Laboratory for Industrial & Applied Mathematics, Department of Mathematics & Statistics, York University, Toronto, ON, Canada (November 1, 2001-July 2004) • Professor, Probability Theory & Mathematical Statistics
    [Show full text]
  • Introduction to Black's Model for Interest Rate
    INTRODUCTION TO BLACK'S MODEL FOR INTEREST RATE DERIVATIVES GRAEME WEST AND LYDIA WEST, FINANCIAL MODELLING AGENCY© Contents 1. Introduction 2 2. European Bond Options2 2.1. Different volatility measures3 3. Caplets and Floorlets3 4. Caps and Floors4 4.1. A call/put on rates is a put/call on a bond4 4.2. Greeks 5 5. Stripping Black caps into caplets7 6. Swaptions 10 6.1. Valuation 11 6.2. Greeks 12 7. Why Black is useless for exotics 13 8. Exercises 13 Date: July 11, 2011. 1 2 GRAEME WEST AND LYDIA WEST, FINANCIAL MODELLING AGENCY© Bibliography 15 1. Introduction We consider the Black Model for futures/forwards which is the market standard for quoting prices (via implied volatilities). Black[1976] considered the problem of writing options on commodity futures and this was the first \natural" extension of the Black-Scholes model. This model also is used to price options on interest rates and interest rate sensitive instruments such as bonds. Since the Black-Scholes analysis assumes constant (or deterministic) interest rates, and so forward interest rates are realised, it is difficult initially to see how this model applies to interest rate dependent derivatives. However, if f is a forward interest rate, it can be shown that it is consistent to assume that • The discounting process can be taken to be the existing yield curve. • The forward rates are stochastic and log-normally distributed. The forward rates will be log-normally distributed in what is called the T -forward measure, where T is the pay date of the option.
    [Show full text]
  • Pricing Bermudan Swaptions on the LIBOR Market Model Using the Stochastic Grid Bundling Method
    Pricing Bermudan Swaptions on the LIBOR Market Model using the Stochastic Grid Bundling Method Stef Maree,∗ Jacques du Toity Abstract We examine using the Stochastic Grid Bundling Method (SGBM) to price a Bermu- dan swaption driven by a one-factor LIBOR Market Model (LMM). Using a well- known approximation formula from the finance literature, we implement SGBM with one basis function and show that it is around six times faster than the equivalent Longstaff–Schwartz method. The two methods agree in price to one basis point, and the SGBM path estimator gives better (higher) prices than the Longstaff–Schwartz prices. A closer examination shows that inaccuracies in the approximation formula introduce a small bias into the SGBM direct estimator. 1 Introduction The LIBOR Market Model (LMM) is an interest rate market model. It owes much of its popularity to the fact that it is consistent with Black’s pricing formulas for simple interest rate derivatives such as caps and swaptions, see, for example, [3]. Under LMM all forward rates are modelled as individual processes, which typically results in a high dimensional model. Consequently when pricing more complex instruments under LMM, Monte Carlo simulation is usually used. When pricing products with early-exercise features, such as Bermudan swaptions, a method is required to determine the early-exercise policy. The most popular approach to this is the Longstaff–Schwartz Method (LSM) [8]. When time is discrete (as is usually the case in numerical schemes) Bellman’s backward induction principle says that the price of the option at any exercise time is the maximum of the spot payoff and the so-called contin- uation value.
    [Show full text]
  • Approximations to the Lévy LIBOR Model By
    Approximations to the Lévy LIBOR Model by Hassana Al-Hassan ([email protected]) Supervised by: Dr. Sure Mataramvura Co-Supervised by: Emeritus Professor Ronnie Becker Department of Mathematics and Applied Mathematics Faculty of Science University of Cape Town, South Africa A thesis submitted for the degree of Master of Science University of Cape Town May 27, 2014 The copyright of this thesis vests in the author. No quotation from it or information derived from it is to be published without full acknowledgement of the source. The thesis is to be used for private study or non- commercial research purposes only. Published by the University of Cape Town (UCT) in terms of the non-exclusive license granted to UCT by the author. University of Cape Town Plagiarism Declaration “I, Hassana AL-Hassan, know the meaning of plagiarism and declare that all of the work in the thesis, save for that which is properly acknowledged, is my own”. SIGNED Hassana Al-Hassan, May 27, 2014 i Declaration of Authorship I, Hassana AL-Hassan, declare that this thesis titled, “The LIBOR Market Model Versus the Levy LIBOR Market Model” and the work presented in it are my own. I confirm that: This work was done wholly or mainly while in candidature for a research degree at this University. Where any part of this thesis has previously been submitted for a degree or any other quali- fication at this University or any other institution, this has been clearly stated. Where I have consulted the published work of others, this is always clearly attributed.
    [Show full text]
  • Interest Rate Models: Paradigm Shifts in Recent Years
    Interest Rate Models: Paradigm shifts in recent years Damiano Brigo Q-SCI, Managing Director and Global Head DerivativeFitch, 101 Finsbury Pavement, London Columbia University Seminar, New York, November 5, 2007 This presentation is based on the book "Interest Rate Models: Theory and Practice - with Smile, Inflation and Credit" by D. Brigo and F. Mercurio, Springer-Verlag, 2001 (2nd ed. 2006) http://www.damianobrigo.it/book.html Damiano Brigo, Q-SCI, DerivativeFitch, London Columbia University Seminar, November 5, 2007 Overview ² No arbitrage and derivatives pricing. ² Modeling suggested by no-arbitrage discounting. 1977: Endogenous short-rate term structure models ² Reproducing the initial market interest-rate curve exactly. 1990: Exogenous short rate models ² A general framework for no-arbitrage rates dynamics. 1990: HJM - modeling instantaneous forward rates ² Moving closer to the market and consistency with market formulas 1997: Fwd market-rates models calibration and diagnostics power ² 2002: Volatility smile extensions of Forward market-rates models Interest rate models: Paradigms shifts in recent years 1 Damiano Brigo, Q-SCI, DerivativeFitch, London Columbia University Seminar, November 5, 2007 No arbitrage and Risk neutral valuation Recall shortly the risk-neutral valuation paradigm of Harrison and Pliska's (1983), characterizing no-arbitrage theory: A future stochastic payo®, built on an underlying fundamental ¯nancial asset, paid at a future time T and satisfying some technical conditions, has as unique price at current time t
    [Show full text]
  • Essays in Quantitative Finance Karlsson, Patrik
    Essays in Quantitative Finance Karlsson, Patrik 2016 Document Version: Publisher's PDF, also known as Version of record Link to publication Citation for published version (APA): Karlsson, P. (2016). Essays in Quantitative Finance. Total number of authors: 1 General rights Unless other specific re-use rights are stated the following general rights apply: Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal Read more about Creative commons licenses: https://creativecommons.org/licenses/ Take down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. LUND UNIVERSITY PO Box 117 221 00 Lund +46 46-222 00 00 Patrik Karlsson Essays in Quantitative Finance Karlsson Essays in Quantitative Patrik Essays in Quantitative Finance Patrik Karlsson 9 789177 Lund Lund University Economic 530602 Department of Economics ISBN 978-91-7753-060-2 Studies ISSN 0460-0029 199 Number 199 Essays in Quantitative Finance Patrik Karlsson DOCTORAL DISSERTATION by due permission of the School of Economics and Management, Lund University, Sweden.
    [Show full text]
  • Activity Report 2014
    Activity Report 2014 s a world-leading financial center building on a A rich history, Switzerland’s financial sector has the natural ambition of housing a world-leading research and training center in banking and finance. The Swiss Finance Institute is the product of this ambition. Established at the initiative of the Swiss Bankers Association, it is a private foundation created in 2006 with the support of the Swiss banking and finance community, the Swiss stock exchange, the Swiss Confederation, the Swiss National Science Foundation, and several Swiss universities with the aim of advancing research activities in finance and executive education in the banking and finance sector. The Swiss Finance Institute encompasses three pre-existing foundations – the International Center for Financial Asset Management and Engineering (FAME), the Swiss Banking School, and the Stiftung Banking und Finance an der Universität Zürich. This merger has led to the creation of one of the major European providers of research, doctoral training, and advanced executive education in banking and finance. This report gives an overview of the Swiss Finance Institute’s activities from January to December 2014. 2 Table of Contents A Word from the Board 4 Swiss Finance Institute Faculty 5 Research Highlights 6 Research Projects 8 PhD Program in Finance 12 PhD Graduate Placements 13 Education 14 Knowledge Center 19 Knowledge Transfer 20 Governing and Advisory Bodies 23 2014 Facts & Figures 25 Research Paper Series 2014 28 SFI Professors 34 SFI Adjunct Professors 66 Overview of Courses Offered in 2014 at the Swiss Finance Institute 68 Knowledge Transfer Events Provided by the Swiss Finance Institute during 2014 69 3 A Word from the Board The Year of Cohesion 2014 saw SFI strengthen collaboration amongst the SFI activity areas, SFI members, and external partners.
    [Show full text]
  • A Random Field LIBOR Market Model
    L’Institut bénéficie du soutien financier de l’Autorité des marchés financiers ainsi que du ministère des Finances du Québec Document de recherche DR 14-02 A Random Field LIBOR Market Model Novembre 2014 Ce document de recherche a été rédigée par : Tao L. Wu et Shengqiang Xu L'Institut canadien des dérivés n'assume aucune responsabilité liée aux propos tenus et aux opinions exprimées dans ses publications, qui n'engagent que leurs auteurs. De plus, l'Institut ne peut, en aucun cas être tenu responsable des conséquences dommageables ou financières de toute exploitation de l'information diffusée dans ses publications. A Random Field LIBOR Market Model Tao L. Wu∗and Shengqiang Xu January 1, 2014 A random field LIBOR market model (RFLMM) is proposed by extend- ing the LIBOR market model, with interest rate uncertainties modeled via a random field. First, closed-form formulas for pricing caplet and swaption are derived. Then the random field LIBOR market model is integrated with the lognormal-mixture model to capture the implied volatility skew/smile. Finally, the model is calibrated to cap volatility surface and swaption volatil- ities. Numerical results show that the random field LIBOR market model can potentially outperform the LIBOR market model in capturing caplet volatility smile and the pricing of swaptions, in addition to possessing other advantages documented in the previous literature (no need of frequent re- calibration or to specify the number of factors in advance). 1 Introduction In this paper we extend the LIBOR market model (LMM) by describing forward rate uncertainties as a random field.
    [Show full text]
  • Interest Rate Volatility IV
    The LMM methodology Dynamics of the SABR-LMM model Covariance structure of SABR-LMM Interest Rate Volatility IV. The SABR-LMM model Andrew Lesniewski Baruch College and Posnania Inc First Baruch Volatility Workshop New York June 16 - 18, 2015 A. Lesniewski Interest Rate Volatility The LMM methodology Dynamics of the SABR-LMM model Covariance structure of SABR-LMM Outline 1 The LMM methodology 2 Dynamics of the SABR-LMM model 3 Covariance structure of SABR-LMM A. Lesniewski Interest Rate Volatility The LMM methodology Dynamics of the SABR-LMM model Covariance structure of SABR-LMM The LMM methodology The main shortcoming of short rate models is that they do not allow for close calibration to the entire volatility cube. This is not a huge concern on a trading desk, where locally calibrated term structure models allow for accurate pricing and executing trades. It is, however, a concern for managers of large portfolios of fixed income securities (such as mortgage backed securities) which have exposures to various segments of the curve and various areas of the vol cube. It is also relevant in enterprise level risk management in large financial institutions where consistent risk aggregation across businesses and asset classes is important. A methodology that satisfies these requirements is the LIBOR market model (LMM) methodology, and in particular its stochastic volatility extensions. That comes at a price: LMM is less tractable than some of the popular short rate models. It also tends to require more resources than those models. We will discuss a natural extension of stochastic volatility LMM, namely the SABR-LMM model.
    [Show full text]
  • Efficient Pricing and Greeks in the Cross-Currency LIBOR Market Model
    Efficient pricing and Greeks in the cross-currency LIBOR market model Chris J. Beveridge, Mark S. Joshi and Will M. Wright The University of Melbourne October 14, 2010 Abstract We discuss the issues involved in an efficient computation of the price and sensitivities of Bermudan exotic interest rate derivatives in the cross-currency displaced diffusion LIBOR market model. Improve- ments recently developed for an efficient implementation of the displaced diffusion LIBOR market model are extended to the cross-currency setting, including the adjoint-improved pathwise method for comput- ing sensitivities and techniques used to handle Bermudan optionality. To demonstrate the application of this work, we provide extensive numerical results on two commonly traded cross-currency exotic interest rate derivatives: cross-currency swaps (CCS) and power reverse dual currency (PRDC) swaps. 1 Introduction Long-dated callable notes with coupons linked to a foreign-exchange rate pose exceptional problems to a risk-manager. The callable power reverse dual is the most notorious such product. In order, to properly model the dynamics of the interest-rates in two different currencies and an exchange rate, a high-dimensional model is necessary. Whilst it is just about possible to use 3 factors, one per currency and the exchange rate, there is a clear need to benchmark against high-dimensional models for the assessment of model risk. Such models necessitate the use of Monte Carlo simulation. However, each step of the Monte Carlo simulation for such complicated products requires much compu- tational effort, and we will have many steps for a 30-year note. In addition, callability is tricky because of the non-availability of continuation values.
    [Show full text]
  • Markov Functional Interest Rate Models with Stochastic Volatility
    Markov Functional interest rate models with stochastic volatility New College University of Oxford A thesis submitted in partial fulfillment of the MSc in Mathematical Finance December 9, 2009 To Rahel Acknowledgements I would like to thank my supervisor Dr Jochen Theis for advising me throughout the project and proof–reading of this dissertation. Furthermore I want to extend my gratitude to d–fine GmbH for giving me the opportunity to attend the MSc in Mathematical Finance programme. But above all I am indebted to my family, especially to my wife Rahel, for their great support and patience. Abstract With respect to modelling of the (forward) interest rate term structure under consideration of the market observed skew, stochastic volatility Libor Market Models (LMMs) have become predominant in recent years. A powerful rep- resentative of this class of models is Piterbarg’s forward rate term structure of skew LMM (FL–TSS LMM). However, by construction market models are high– dimensional which is an impediment to their efficient implementation. The class of Markov functional models (MFMs) attempts to overcome this in- convenience by combining the strong points of market and short rate models, namely the exact replication of prices of calibration instruments and tractabil- ity. This is achieved by modelling the numeraire and terminal discount bond (and hence the entire term structure) as functions of a low–dimensional Markov process whose probability density is known. This study deals with the incorporation of stochastic volatility into a MFM framework. For this sake an approximation of Piterbarg’s FL–TSS LMM is de- vised and used as pre–model which serves as driver of the numeraire discount bond process.
    [Show full text]