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Stochastic and PDE Methods in Financial Mathematics, 2012, Armenia Workshop on STOCHASTIC and PDE METHODS in FINANCIAL MATHEMATICS 7 - 12 September, 2012, Yerevan, Armenia Yerevan, 2012 Organizers: Host Institutions Institute of Mathematics of the National Academy of Sciences Yerevan State University American University of Armenia Scientific Committee Rama Cont (CNRS - Université de Paris VI, France) Levon Goukasian (Pepperdine University, USA) Walter Schachermayer (University of Vienna, Austria) Henrik Shahgholian (KTH, Sweden) Johan Tysk (Uppsala University, Sweden) Organizing Committee Rafayel Barkhudaryan (Institute of Mathematics NAS, Armenia) Aram Hajian (American University of Armenia, Armenia) Aram Hakobyan (Yerevan State University, Armenia) Michael Poghosyan (Yerevan State University, Armenia) Sponsors: • The Research Mathematics Fund • KTH Royal Institute of Technology • State Committee of Science, Armenia • International Mathematical Union • "Hyur Service" LLC CONTENTS Agliardi R. Exotic options under Lévy processes . .6 Aramyan R. A Coherent Measure of Risk for Multivariate Portfolios . .7 Bentata A. Markovian Projection of Stochastic Processes . .9 Biagini S. Dynamic quasi concave performance measures . .9 Bion-Nadal J. Dynamic Risk Measures and PDE: Application to a Sto- chastic Volatility Model . 10 Boghosian B. Wealth distribution in Asset Exchange Models . 11 Cont R. Functional Kolmogorov equations . 11 Dadashi H. Small Noise Limit for Mild Solution of Stochastic Evolution Equations with Monotone Nonlinearity and Multiplicative Lévy Noise 12 Djehiche B. A characterization of subperfect Nash equilibria and appli- cation to portfolio choice . 13 Englezos N. Infinite Horizon FBSDEs: Rational Expectations Control and Stochastic Viscosity Solutions . .13 Feehan P. Existence, uniqueness, and optimal regularity for degenerate obstacle problems . 14 Gasparian K. About uniform O-supermartingale decomposition in non- standard case . 15 Gomes D. Variational and quasi-variational mean-field games . 16 Guéant O. General intensity shape for optimal liquidation with limit orders ................................................................ 17 Kao Ch. Portfolio Selection: A Stochastic Analysis . 18 Kramkov D. Backward martingale representation and the existence of a 3 complete equilibrium . 19 Lapshin V. An Infinite-Dimensional Interest Rates Term Structure Model: Arbitrage-Free, Realistic and Practical . 19 Mania M. Utility Maximization and Hedging in Incomplete Markets and related Backward Stochastic PDEs . 20 Markowich P. On PDE Models for (some) Socio-Economic Problems 21 Mijatovic A. Coupling and tracking of regime-switching martingales 21 Pascucci A. Adjoint expansions in local Lévy models . 22 Pop C. Degenerate-parabolic partial differential equations with unboun- ded coefficients, martingale problems, and a mimicking theorem for Itô processes . 22 Ratanov N. Option pricing model based on telegraph-like process . 23 Ruf J. Why are quadratic normal volatility models analytically trac- table? ................................................................. 24 Schachermayer W. Portfolio Optimisation under Transaction Costs . 25 Soner H. M. Homogenization and asymptotics with small transaction costs .................................................................. 25 Teichmann J. An SPDE governing the term structure of option prices 26 Vasilyeva T. Numerical methods for evaluating financial options . 27 Vecer J. Asian Options on Harmonic Average . 28 Voskanyan V., Gomes D. Extended mean-field games, existence and uniqueness . .29 Yeressian K. Spatial Decay Estimates for Parabolic Integro-Differential Equations . 31 Zubelli J. Calibration of Stochastic Volatility Models by Convex Regu- larization . 32 4 ABSTRACTS Exotic options under Levy processes Rossella Agliardi (University of Bologna, Italy) [email protected] In this work some pricing formulas are obtained for several exotic op- tions when regular Lévy processes of exponential type (RLPE) are adopted as the driving processes. The development of pricing models replacing the traditional underlying source of randomness, the Brownian motion, by a Lévy process has fostered a good deal of work on exotic option pricing which parallels the existing results in the Gaussian framework. In our work the focus is on the pricing of European exotics and the aim is to present a valuation formula which is the most comprehensive as possi- ble, in that several types of options can be priced directly and no specific method has to be devised for each of them. The formula is tailored to valuate discretely monitored options, which are the most popular ones in view of the regulatory issues and the trading practice. However, the continuous counterpart can be derived in some cases. This work employs a general framework and provides new pricing formulas for exotic option prices. Since a Brownian motion is a RLPE of order 2 and any exponential type - and thus is captured in this framework - each example includes the known pricing expressions of the classical Gaussian modeling. An exten- sion is also provided to more general Feller processes and an approximate pricing formula is obtained by employing the fundamental solution to the Cauchy problem for some pseudo-differential operators. References [1] R. Agliardi, "A comprehensive mathematical approach to exotic op- tion pricing" (2011), Mathematical Methods in the Applied Sciences (forthcoming) 6 [2] R. Agliardi, "Option pricing under some Lévy-like stochastic pro- cesses" (2011), Applied Mathematics Letters, v.24, 572-576 A Coherent Measure of Risk for Multivariate Portfolios Rafik Aramyan (Institute of Mathematics NAS and Russian-Armenian State University, Armenia) rafi[email protected] Measures of risk are widely used in financial engineering to assess the risk of investments and to optimise the capital allocation. The modern theory of coherent risk measures (see [1],[2],[3]) aims to derive proper- ties of risk measures from several basic axioms: translation-invariance, monotonicity, homogeneity, and convexity. The risk measures are mostly considered in the univariate case. When assessing risks of multivariate portfolios, the situation becomes more complicated. Let X be a random variable in R1 that is the changes of values between two dates X = DPi. Definition. A measure of risk is a function R(DPi). A measure of risk satisfying the following axioms is called coherent (consistent): 1. Translation invariance: R(DPi + Q) = R(DPi) − Q. 2. Subadditivity: R(DPi1 + DPi2) ≤ R(DPi1) + R(DPi2). 3. Positive Homogeneity: R(lDPi) = lR(DPi) if l > 0. 4. Monotonicity: If DPi1 ≤ DPi2 a.s., then R(DPi2) ≤ R(DPi1). In [1] was shown that the function (expected shortfall) 1 Z a Ra(X) = − Q(t)dt a 0 7 is a coherent measure of risk. Here Q signifies the quantile function of DPi, 0 ≤ a ≤ 1. Now let X be a random vector in Rn that represents a financial gain for multivariate portfolios. We define (see [2]) Z a 1 n H(p) = − Q(p,X)(t)dt, p 2 R , (1) a 0 here Q(p,X) signifies the quantile function of scalar product (p, X). By B ⊂ Rn we denote the unique convex body (well known fact from convex geometry) whose support function is given by (1). By d(B) we denote the diameter of B. Now we consider the function Ra(X) = d(B) as a measure of risk of X. Theorem. The measure of risk d(B) is subadditive, positive homogeneous and monotonic. References [1] Artzner, P., Delbaen, F., Eber, J.M., Heath, D.: Coherent measures of risk. Math. Finance 9, 203 - 228, 1999. [2] Mosler, K.: Multivariate Dispersion, Central Regions and Depth. The Lift Zonoid Approach. Lecture Notes in Statistics, vol. 165. Springer, Berlin, 2002. [3] I. Cascos, I. Molchanov. Multivariate risks and depth-trimmed regions, Journal: Finance and Stochastics , vol. 11, no. 3, pp. 373-397, 2007. 8 Markovian Projection of Stochastic Processes Amel Bentata (Universität Zürich, Switzerland) [email protected] We give conditions under which the flow of marginal distributions of a discontinuous semimartingale can be matched by a Markov process whose infinitesimal generator can be expressed in terms of its local char- acteristics, generalizing a result of Gyongy (1986) to the discontinuous case. Our construction preserves the martingale property and allows to derive a partial integro-differential equation for the one-dimensional dis- tribution of discontinuous semimartingales, extending the Kolmogorov forward equation (Fokker Planck equation) to a non-Markovian setting. Dynamic quasi concave performance measures Sara Biagini (University of Pisa, Italy) [email protected] We define conditional quasi concave performance measures (CPMs), to accommodate for additional information. A particular care is put in the selection of the continuity property that CPMs must satisfy. Our notion encompasses a wide variety of cases, among which conditional accept- ability indexes. We provide the characterization of a CPM in terms of a minimal family of conditional convex risk measures. In the case of indexes these risk measures are coherent. Then, dynamic performance measures (DPMs) are introduced and the problem of time consistency is addressed. The definition of time consistency chosen here ensures that the positions which are considered good tomorrow are already considered good today. Finally, we prove the equivalence between time consistency for a DPM and a type of weak acceptance consistency for the associated minimal families 9 of risk measures. This is joint work with J. Bion-Nadal. Dynamic Risk Measures and PDE Application to a Stochastic Volatility Model Jocelyne Bion-Nadal (CMAP,
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