Probabilistic aspects of finance

DOI10.3150/12-BEJSP05zbMATH Open1279.91053arXiv1309.7759MaRDI QIDQ373529FDOQ373529

Authors: Hans Föllmer, Alexander Schied 

Publication date: 17 October 2013

Published in: Bernoulli (Search for Journal in Brave)

Abstract: In the past decades, advanced probabilistic methods have had significant impact on the field of finance, both in academia and in the financial industry. Conversely, financial questions have stimulated new research directions in probability. In this survey paper, we review some of these developments and point to some areas that might deserve further investigation. We start by reviewing the basics of arbitrage pricing theory, with special emphasis on incomplete markets and on the different roles played by the "real-world" probability measure and its equivalent martingale measures. We then focus on the issue of model ambiguity, also called Knightian uncertainty. We present two case studies in which it is possible to deal with Knightian uncertainty in mathematical terms. The first case study concerns the hedging of derivatives, such as variance swaps, in a strictly pathwise sense. The second one deals with capital requirements and preferences specified by convex and coherent risk measures. In the final two sections we discuss mathematical issues arising from the dramatic increase of algorithmic trading in modern financial markets.

Full work available at URL: https://arxiv.org/abs/1309.7759

Recommendations

• Viability and arbitrage under Knightian uncertainty
• Financial economics without probabilistic prior assumptions
• scientific article; zbMATH DE number 5348177
• Arbitrage-free modeling under Knightian uncertainty
• Mathematics of financial markets

zbMATH Keywords

model uncertaintyincomplete marketKnightian uncertaintyprice impactconvex risk measurehedgingmarket impact modelcoherent risk measurealgorithmic tradingvariance swaparbitrage pricing theorymonetary measure of risksuperhedgingpathwise Itō calculus

Mathematics Subject Classification ID

Decision theory (91B06) Portfolio theory (91G10) Fundamental topics (basic mathematics, methodology; applicable to economics in general) (91B02) Microeconomic theory (price theory and economic markets) (91B24)

Cites Work

• The pricing of options and corporate liabilities
• Title not available (Why is that?)
• Coherent measures of risk
• Robust Statistics
• Maxmin expected utility with non-unique prior
• Martingales and arbitrage in multiperiod securities markets
• The fundamental theorem of asset pricing for unbounded stochastic processes
• A general version of the fundamental theorem of asset pricing
• Functional Itō calculus and stochastic integral representation of martingales
• Title not available (Why is that?)
• A control problem with fuel constraint and Dawson-Watanabe superprocesses
• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• Ambiguity Aversion, Robustness, and the Variational Representation of Preferences
• Price Manipulation and Quasi-Arbitrage
• Stochastic finance. An introduction in discrete time
• Consistent variance curve models
• Robust hedging of the lookback option
• Convex measures of risk and trading constraints
• The asymptotic elasticity of utility functions and optimal investment in incomplete markets
• Efficient hedging: cost versus shortfall risk
• Optional decomposition of supermartingales and hedging contingent claims in incomplete security markets
• The mathematics of arbitrage
• Robust hedging of barrier options.
• No-dynamic-arbitrage and market impact
• Price dynamics in a Markovian limit order market
• Arbitrage bounds for prices of weighted variance swaps
• Robust hedging of double touch barrier options
• Multidimensional stochastic processes as rough paths. Theory and applications.
• High-frequency trading in a limit order book
• Robust Preferences and Robust Portfolio Choice
• Optimal Portfolio and Consumption Decisions for a “Small Investor” on a Finite Horizon
• Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market
• System Control and Rough Paths
• Order book resilience, price manipulation, and the positive portfolio problem
• Optimal execution strategies in limit order books with general shape functions
• Exposition of a New Theory on the Measurement of Risk
• Title not available (Why is that?)
• Title not available (Why is that?)
• Integral Representation Without Additivity
• Dynamic spanning without probabilities
• Introduction to stochastic calculus for finance. A new didactic approach.
• Robustness of the Black and Scholes Formula
• Title not available (Why is that?)
• Robustness of Delta Hedging for Path-Dependent Options in Local Volatility Models
• Order book approach to price impact
• Title not available (Why is that?)
• Necessary and sufficient conditions in the problem of optimal investment in incomplete markets
• Minimax tests and the Neyman-Pearson lemma for capacities
• Asset price bubbles in incomplete markets
• Asset price bubbles in complete markets
• Processes that can be embedded in Brownian motion
• Shifting martingale measures and the birth of a bubble as a submartingale
• Equilibria in financial markets with heterogeneous agents: a probabilistic perspective
• On convex principles of premium calculation
• Optimal investments for risk- and ambiguity-averse preferences: a duality approach
• Title not available (Why is that?)
• A control approach to robust utility maximization with logarithmic utility and time-consistent penalties
• Robust projections in the class of martingale measures
• Superdiffusion and parabolic nonlinear differential equations
• Optional decomposition and Lagrange multipliers
• The fundamental theorems of prevision and asset pricing
• On de Finetti coherence and Kolmogorov probability
• Stochastic Partial Differential Equations and Portfolio Choice
• THE OPINION GAME: STOCK PRICE EVOLUTION FROM MICROSCOPIC MARKET MODELING
• Portfolio choice under dynamic investment performance criteria
• Title not available (Why is that?)
• A Microeconomic Approach to Diffusion Models For Stock Prices
• Title not available (Why is that?)
• Optimal liquidation in dark pools
• Price manipulation in a market impact model with dark pool
• On Embedding Right Continuous Martingales in Brownian Motion
• Optimal Investments for Robust Utility Functionals in Complete Market Models
• On Kolmogorov's equation, by W. Doeblin

Cited In (20)

• A probabilistic approach to the \(\varPhi \)-variation of classical fractal functions with critical roughness
• Title not available (Why is that?)
• Financial risk measurement with imprecise probabilities
• Title not available (Why is that?)
• On the \(p\)th variation of a class of fractal functions
• On a class of generalized Takagi functions with linear pathwise quadratic variation
• Remarks on Föllmer's pathwise Itô calculus
• Bilinear equations in Hilbert space driven by paths of low regularity
• A model‐free approach to continuous‐time finance
• Robust optimal risk sharing and risk premia in expanding pools
• A càdlàg rough path foundation for robust finance
• PRICING DERIVATIVES IN HERMITE MARKETS
• Financial economics without probabilistic prior assumptions
• The fundamental theorem of mutual insurance
• Model-free CPPI
• Itô-Föllmer calculus in Banach spaces. I: The Itô formula
• Some models of exchange trading in high-risk financial markets
• Financial finance
• Title not available (Why is that?)
• Hedging with small uncertainty aversion

This page was built for publication: Probabilistic aspects of finance

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q373529)