Talks in Financial and Insurance Mathematics

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This is the regular weekly research seminar on Insurance Mathematics and Stochastic Finance.

Spring Semester 2010

Note: The highlighted event marks the next occurring event and events marked with an asterisk (*) indicate that the time and/or location are different from the usual time and/or location.

Date / Time Speaker Title Location
25 February 2010
No seminar
4 March 2010
Prof. Dr. Umut Cetin

Dynamic Markov Bridges and Insider Trading  HG G 43 
Abstract: Motivated by the insider trading models of Kyle and Back, we present a theory of Markov bridges. We call them 'dynamic' since the terminal value is not known in advance. In this talk I will describe how to construct a diffusion which is a martingale and whose terminal value is defined by the terminal value of another martingale diffusion observed continuously in time. Our approach is based on nonlinear filtering theory and parabolic PDEs. In particular, we obtain a remarkable PDE whose solution gives the solution to the associated nonlinear filtering problem. If time permits I will also describe an application of our method for the construction of a Brownian motion who is conditioned to hit 0 for the first time at a given function of the hitting time of another Gaussian martingale and discuss its application to an insider trading model for a defaultable derivative of European type. The talk is based on joint works with L. Campi and A. Danilova.
11 March 2010
Yan Dolinsky
ETH Zurich
Shortfall Risk Approximations for American Options in the Multidimensional Black-Scholes Model  HG G 43 
Abstract: We show that shortfall risks of American options in a sequence of multinomial approximations of the multidimensional Black--Scholes (BS) market converge to the corresponding quantities for similar American options in the multidimensional BS market with path dependent payoff s. In comparison to previous papers we consider the multi assets case for which we use the weak convergence approach.
18 March 2010
Attilio Meucci
Managing Diversification  HG G 43 
Abstract: We propose a unified, fully general methodology to analyze and act on diversification in any environment, including long-short trades in highly correlated markets. First, we build the diversification distribution, i.e. the distribution of the uncorrelated bets in the portfolio that are consistent with the portfolio constraints. Next, we summarize the wealth of information provided by the diversification distribution into one single diversification index, the effective number of bets, based on the entropy of the diversification distribution. Then, we introduce the mean-diversification efficient frontier, a diversification approach to portfolio optimization. Finally, we describe how to perform mean-diversification optimization in practice in the presence of transaction and market impact costs, by only trading a few optimally chosen securities.
25 March 2010
Marius Hofert
ETH Zurich
Nested Archimedean Copulas and CDOs  HG G 43 
Abstract: Copulas are distribution functions with standard uniform univariate margins. Beside elliptical copulas (such as the Gaussian or t copula), Archimedean copulas belong to the most important classes of copulas. These copulas can be generalized to nested Archimedean copulas, which provide more flexibility in modeling dependencies, especially in large-dimensional applications. In this talk, we start with motivating the use of nested Archimedean copulas and then focus on sampling algorithms for these copulas. As an application, we introduce a model for pricing Collateralized Debt Obligations (CDOs). This model generalizes the CDO pricing models of Li (2000) and Schoenbucher and Schubert (2001). We introduce a calibration algorithm for our model and construct an optimization algorithm for finding the copula parameters that describe given data best. We also show the calibration results to iTraxx data and discuss why this model adequately captures the underlying portfolio of credit default swaps.
* 1 April 2010
Turan Gokcen Bali
A Cross-Sectional Investigation of the Conditional ICAPM  HG F 26.1 
Abstract: This paper provides a cross-sectional investigation of the conditional and unconditional intertemporal capital asset pricing model (ICAPM). Our results indicate that the unconditional ICAPM does not capture the time-series and cross-sectional variation in expected returns, and the estimation of the conditional ICAPM with a pooled panel of time-series and cross-sectional data in a multivariate GARCH-in-mean model is crucial to identifying the positive risk-return tradeoff. The paper tests the cross-sectional consistency of the intertemporal relation by estimating the model with different slopes on the conditional covariance between equity and market portfolios. The results show the equality of positive slope coefficients across all portfolios, which empirically validates the conditional ICAPM. The conditional alpha estimates indicate that the time-varying conditional covariances explain the industry, size and value premiums, but the momentum profits cannot be explained by the conditional measures of market risk. (Joint work with Robert F. Engle).
8 April 2010
No seminar (Easter week)
* 15 April 2010
Shige Peng
Shandong University, China
On G-Martingale and G-Martingale Representation  HG E 41 
Abstract: We present some new estimates for solving martingale representation problem under G-expectations. We also study the corresponding conditions for the existence and uniqueness by using the estimates.
15 April 2010
John Nolan
American University, Washington, D.C.
A Gentle Introduction to Stable Distributions  HG G 43 
Abstract: Stable distributions are a class of heavy tailed probability distributions that generalize the Gaussian distribution and that can be used to model a variety of problems. An overview of univariate stable laws is given, with emphasis on the practical aspects of working with stable distributions. Then a range of statistical applications will be explored. If there is time, a brief introduction to multivariate stable distributions will be given.
22 April 2010
Luciano Campi
CEREMADE, Universite de Paris-Dauphine
A structural risk-neutral approach for option pricing and hedging in energy markets  (CANCELLED) HG G 43 
Abstract: We will present a joint model for energy and fuels for pricing and hedging derivatives on spot and forward energy contracts. The main feature of the model is the following: Since energy is not storable, usual no-arbitrage arguments have to be carefully justified. For circumventing this difficulty, we consider an enlarged market where agents not only can buy (and consume) electricity and invest in the bank account, but they are also allowed to invest in fuels. In the market of fuels, one can properly define no-arbitrage condition and use risk-neutral pricing and hedging techniques, since fuels can be stored (even though at a certain cost). We are able to transfer risk-neutral methods from fuels to electricity via the production function of a given energy producer, so that derivatives on energy can be viewed as a kind of basket derivative on fuels. That production function involves an additional and non-tradable random source driving the demand for electricity, so making the market incomplete. We will discuss how spot and forward energy prices are related and give some pricing and optimal hedging formula for derivatives on electricity, based on local risk minimization approach. This talk is based on joint works with René Aid (EDF), Nicolas Langrené, Adrien Huyen-Huu (EDF) and Nizar Touzi (Ecole Polytechnique).
22 April 2010
Guus Balkema
University of Amsterdam, The Netherlands
High risk scenarios and conditional extremes  HG G 43 
Abstract: In univariate extremes there has been a shift from maxima to exceedances. In the multivariate situation there are different ways to describe extremes. In this talk I will discuss exceedances over hyperplanes. Random vectors conditioned to lie in a halfspace have been termed high risk scenarios. The asymptotic behaviour of high risk scenarios, as the bounding hyperplane moves off to infinity, is of interest in risk analysis and in quality control. I will give a short exposition of the asymptotic theory of high risk scenarios developed by Paul Embrechts and myself, and show how this theory is related to results by Sid Resnick, Jonathan Tawn, Anthony Ledford and Janet Heffernan on conditional extremes.
29 April 2010
Michel Dacorogna
SCOR Switzerland
Principle-based solvency: A comparison between Solvency II and the Swiss Solvency Test  HG G 43 
Abstract: With the adoption of the Solvency II directive, the European parliament has opened up a new area for insurance in terms of solvency regulation. This marks a change in paradigm: instead of relying on a simple, balance sheet-based formula to assess the solvency of a company, the regulators want to push the industry into developing their own risk management and using their own internal models to assess risk. This opens up new academic challenges in insurance and financial mathematics.
6 May 2010
Fabio Sigrist
ETH Zurich
Censored Gamma Regression Models for Limited Dependent Variables with an Application to Loss Given Default  HG G 43 
Abstract: A regression model for limited dependent variables having a non-negligible probability of attaining exactly their limits is presented. The model determines the discrete and continuous parts jointly by the same parameters. Two extensions of the model relaxing the assumption that only one mechanism governs both the discrete and the continuous parts are introduced as well. It is shown how to estimate these models and they are applied to a Loss Given Default dataset from an insurance category known as "surety". Further developments include extensions which allow for modeling dependency.
13 May 2010
No seminar (holiday)
* 20 May 2010
Robert Almgren
Courant Institute of Mathematical Sciences, New York University
The Mathematics of Adaptive Execution  HG F 26.1 
Abstract: Algorithmic execution of large transactions in equity and other markets is a large and growing business. The goal is to optimize the overall execution results relative to some benchmark specified by the client, generally involving some combination of minimum market impact and exposure to volatilty risk. An increasingly important trend in recent years is dynamically adaptive algorithms, that adjust execution in response to short-term variations in estimated market liquidity and volatility. The mathematical challenge is to combine that instantaneous response with a more strategic point of view that optimizes an overall combination of impact cost and volatility risk. We summarize some recent work using dynamic programming to calculate and implement optimally adaptive strategies.
20 May 2010
Prof. Dr. Alexander Schied
University of Mannheim
On modeling the transience of price impact  HG G 43 
Abstract: Empirical studies have shown that the price impact of large trades is, to a large extent, neither entirely instantaneous nor completely permanent but rather predominantly transient. That is, after its creation it decays in time before it eventually vanishes. In this talk, we will discuss some of the models that were proposed so as to describe the transience of price impact. We will start by looking at the linear case and then turn to models with nonlinear price impact. Our approach to analyze these models consists in looking at strategies that minimize the expected trade execution costs.
27 May 2010
Antoon Pelsser
Maastricht University
Title T.B.A. (CANCELLED) HG G 43 
* 27 May 2010
Mathieu Rosenbaum
CMAP-Ecole Polytechnique Paris
On Lead-Lag Estimation  HG G 43 
Abstract: It is commonly acknowledged by financial practitioners that some assets are "leading" or "driving" others. This means that their behaviour at a given time has a major influence on the behaviour of some other "follower" or "lagger" assets, after some time delay. In this talk, we propose a simple model enabling to define the notion of "lead-lag" between two assets in a mathematical way. In this model, we study the problem of estimating the lead-lag parameter based on high frequency observations of the assets. This talk is based on joint works with Marc Hoffmann, Christian Y. Robert and Nakahiro Yoshida.
3 June 2010
No seminar

Organizers: Catherine Donnelly

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