Methods of mathematical finance
This mathematical monograph on finance models is intended to provide a thorough analysis for some of the financial instruments that are currently used to enhance the efficiency of an economy. Centred around the main ideas of the mean-variance analysis of portfolios, and of the derivative securities on the financial market the exposed models are built using stochastic calculus, are fit to the data by careful statistical estimation procedures, and require accurate and fast real-time numerical analysis instruments. The book of loannis Karatzas and Steven E. Shreve is written in the definition / theorem / proof style of modern mathematics and attempts to explain in detail the finance motivation and terminology. An extensive bibliography and explanatory notes are included at the end of each chapter, trying to clear further some of the chapter contents, and to point the reader toward some of the topics not touched. The six chapters of the book can be briefly summarized as follows: Chapter 1 (A Brownian model of financial markets) sets up the generally accepted Brownian-motion-driven model for financial markets. Because the coefficient processes in this model are themselves stochastic processes, this is one of the most general continuous-time model conceivable among those in which prices move continuously. There are introduced notions and results about portfolio and consumption rules, arbitrage, equivalent martingale measures, attainability of contingent claims, and the important concept of financial market completeness. Chapter 2 (Contingent claim valuation in a complete market) of the book lays out the theory of pricing and hedging contingent claims (i.e. derivative, securities) in the context of a complete market. The authors analyzed in detail the pricing and hedging for a number of different options, and include a section on ``future contract, derivation securities whose value is defined recursively. Chapter 3 (Single-agent consumption and investment) considers the problem of a single agent faced with optimal consumption and investment decisions in the complete version of the market model exposed in the first chapter. Mathematical tools from stochastic calculus and partial differential equations of parabolic type permit a general treatment of the associated optimization problem. This theory is related to the Markowitz's mean-variance analysis and provides a better understanding on how the financial markets operate. Chapter 4 (Equilibrium in a complete market) contains results that naturally continue the premises within Chapter 3. Through the law of supply and demand collective actions of several individuals may determine the so-called equilibrium prices of securities in the market. Characterization of this equilibrium allows the study of questions about the effect of interventions in the market. Chapter 5 (Contingent claims in incomplete markets) focuses to the more difficult issue of pricing and hedging contingent claims in markets with incompleteness or other constraints on individual investor's portfolio choices. The approach based on ``fictitious completion for such a market, coupled with notions and results from convex analysis and duality theory, permits quite a general solution to the hedging problem. The final Chapter 6 (Constrained consumption and investment) is using the approach developed in Chapter 5 in order to treat the optimal consumption / investment problem for incomplete or constrained financial markets, and for markets with different interest rates for borrowing and investing. Five technical appendices investigate and complete with new aspects the mathematical and financial arguments for some of the important problem considered within the book chapters.
- Optimal lifetime consumption and investment under a drawdown constraint
- Constrained nonsmooth utility maximization without quadratic inf convolution
- Timing of investment under technological and revenue-related uncertainties
- Non-linear properties of conditional returns under scale mixtures
- Optimal portfolio, consumption and retirement decision under a preference change
- Minimizing the lifetime shortfall or shortfall at death
- A general framework for evaluating executive stock options
- Annuitization and asset allocation
- Optimal consumption and investment under partial information
- Optimal consumption choice with intolerance for declining standard of living
- General maximum principles for partially observed risk-sensitive optimal control problems and applications to finance
- Risk-sensitive portfolio optimization problems with fixed income securities
- Convexity bias in Eurodollar futures prices: A dimension-free HJM criterion
- Optimality of myopic strategies for multi-stock discrete time market with management costs
- Robust static hedging of barrier options in stochastic volatility models
- Backward stochastic differential equations with constraints on the gains-process
- Reflected solutions of backward SDE's, and related obstacle problems for PDE's
- Constrained stochastic estimation algorithms for a class of hybrid stock market models
- An economic premium principle in a multiperiod economy.
- A bounded risk strategy for a market with non-observable parameters.
- Pricing contingent claims in incomplete markets when the holder can choose among different payoffs.
- Optimal portfolio and background risk: an exact and an approximated solution.
- A complete explicit solution to the log-optimal portfolio problem.
- Non-addictive habits: optimal consumption-portfolio policies.
- Fair valuation of path-dependent participating life insurance contracts.
- A stability result for the HARA class with stochastic interest rates.
- Perpetual options and Canadization through fluctuation theory
- Financial options and statistical prediction intervals
- A stochastic representation for mean curvature type geometric flows
- Optimal consumption from investment and random endowment in incomplete semimartingale markets.
- Rational equilibrium asset-pricing bubbles in continuous trading models
- Dynamics aggregation in stochastic control problems
- Maximum principle of optimal stochastic control with terminal state constraint and its application in finance
- Testing monotonicity of pricing kernels
- Turnpike property and convergence rate for an investment model with general utility functions
- Variational formulation of a general equilibrium model with incomplete financial markets and numeraire assets: existence
- Commodity spread option with cointegration
- The end of the month option and other embedded options in futures contracts
- On zero-sum optimal stopping games
- On relative performance, remuneration and risk taking of asset managers
- Sensitivity analysis for expected utility maximization in incomplete Brownian market models
- A limited-feedback approximation scheme for optimal switching problems with execution delays
- Equilibrium returns with transaction costs
- Equal risk pricing under convex trading constraints
- Equilibrium consumption and portfolio decisions with stochastic discount rate and time-varying utility functions
- Optimal asset allocation with fixed-term securities
- Portfolio selection with consumption ratcheting
- Optimal investment and consumption for an insurer with high-watermark performance fee
- Maximum principle for optimal control problems of forward-backward regime-switching systems involving impulse controls
- An optimal job, consumption/leisure, and investment policy
- Quadratic minimization with portfolio and intertemporal wealth constraints
- Purchasing casualty insurance to avoid lifetime ruin
- Optimal investment strategies for participating contracts
- Dual control Monte-Carlo method for tight bounds of value function in regime switching utility maximization
- On the existence of competitive equilibrium in frictionless and incomplete stochastic asset markets
- Stochastic optimality in the portfolio tracking problem involving investor's temporal preferences
- Quantile hedging pension payoffs: an analysis of investment incentives
- Stochastic maximum principle with Lagrange multipliers and optimal consumption with Lévy wage
- Time-consistent stopping under decreasing impatience
- Optimal investment and consumption when allowing terminal debt
- Contingent claim pricing through a continuous time variational bargaining scheme
- Optimal harvesting for a logistic growth model with predation and a constant elasticity of variance
- The dividend problem with a finite horizon
- Exact and efficient sampling of conditioned walks
- An expansion in the model space in the context of utility maximization
- Stability of Radner equilibria with respect to small frictions
- On the free boundary of an annuity purchase
- The optimal portfolio selection model under \(g\)-expectation
- Finite-horizon optimal consumption and investment problem with a preference change
- The interaction of debt financing, cash grants and the optimal investment policy under uncertainty
- Transition probabilities for degenerate diffusions arising in population genetics
- Optimal investment of DC pension plan under short-selling constraints and portfolio insurance
- Optimal consumption and portfolio selection problems under loss aversion with downside consumption constraints
- Volatility and arbitrage
- An example of a stochastic equilibrium with incomplete markets
- Strict local martingale deflators and valuing American call-type options
- Long-term optimal portfolios with floor
- An optimal stopping problem with a reward constraint
- A two-step simulation procedure to analyze the exercise features of American options
- Convexity of the optimal stopping boundary for the American put option
- Linear and nonlinear price decentralization
- Utility maximization with a stochastic clock and an unbounded random endowment
- Characterization of arbitrage-free markets
- Numerical valuation of options with jumps in the underlying
- A unification of hypercontractivities of the Ornstein-Uhlenbeck semigroup and its connection with {\(\Phi\)}-entropy inequalities
- On the pricing of contingent claims under constraints
- Asset pricing in an intertemporal partially-revealing rational expectations equilibrium.
- The valuation of European options in uncertain environment
- The optimal uniform approximation of systems of stochastic differential equations
- Minimizing shortfall risk and applications to finance and insurance problems
- Optimal contingent claims.
- Optimal consumption choice with intertemporal substitution
- On trees and logs
- Martingale representation theorems for initially enlarged filtrations.
- A partial introduction to financial asset pricing theory.
- Free lunch and arbitrage possibilities in a financial market model with an insider.
- Utility maximizing entropy and the second law of thermodynamics.
- Optimal investment with random endowments in incomplete markets.
- HARA frontiers of optimal portfolios in stochastic markets
- Optimal stopping for dynamic convex risk measures
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