From "simple" stochastic control problems to "more realistic" ones:
an example from portfolio theory
In this talk we take an example from life-cycle portfolio theory
(modelled as a stochastic optimal control problem)
where we see how different economic questions, possibly arising from experimental data,
bring to formulate and study more complex problems, in particular
models which display path dependency and/or Mc Kean - Vlasov type dynamics.
Ongoing results on such problems will be presented.
We will discuss, depending on the available time, the following modelling levels.
Level 1: Lifecycle portfolio with Labor Income
Level 2: Lifecycle portfolio with Path-Dependent Labor Income (History dependent wages)
Level 3/1: Lifecycle portfolio with Path-Dependent Labor Income with uncertainty on parameters
(Taking account of estimation errors)
Level 3/2: Lifecycle portfolio with Path-Dependent Labor Income with Mc Kean-Vlasov type dynamics
(Taking account of the effect of the environment: "Keeping up with the Joneses")
Based on joint papers/work in progress with various authors
( Biagini, Biffis, Cosso, Djeiche, Kharroubi, Pham, Prosdocimi, Rosestolato, Zanco, Zanella).
Dr. Yvain BRUNED (University of Edinburgh)
15th of October
BPHZ renormalisation and vanishing subcriticality limit of the fractional $\Phi^3_d$ model.
In this talk, we consider the fractional $\Phi^3_d$ model which is a stochastic PDEs on the d-dimensional torus
with fractional Laplacian and quadratic nonlinearity driven by space-time white noise.
We obtain precise asymptotics on the renormalisation counterterms as the mollification parameter becomes small and the parameter of the fractional Laplacian approaches its critical value.
Multilevel Picard approximations for high-dimensional semilinear parabolic partial differential equations
We present new approximation methods for high-dimensional semilinear parabolic PDEs. A key idea of our methods is to combine multilevel approximations with Picard fixed-point approximations. We prove in the case of semilinear heat equations with Lipschitz continuous nonlinearities that the computational effort of one of the proposed methods grows polynomially both in the dimension and in the reciprocal of the required accuracy. We illustrate the efficiency of the approximation methods by means of numerical simulations. The talk is based on joint works with Weinan E, Martin Hutzenthaler, Arnulf Jentzen, Tuan Nguyen and Philippe Von Wurstemberger.
Prof. Jacco THIJSSEN (University of York)
29th of October
Predatory Pricing and the Value of Corporate Cash Holdings
We analyze the interaction between firms' payout policies and their decisions in product markets in a continuous-time stochastic game between two firms. One of these is financially constrained, whereas the other is not. Contrary to the standard literature we allow firms to choose production and payout strategies, and focus on the effect of predation incentives on both. We find that predation induces fewer dividend payouts. Furthermore, the liquidity position of the constrained firm has an economically significant effect on the production choices of both firms and, thus, on the evolution of profits, cash holdings and stock returns.
Prof. Elisa ALOS (University Pompeu Fabra, Barcelona)
12th of November
On the difference between volatility swaps and the ATM implied volatility
This talk focuses on the difference between the fair strike of a volatility swap and the at-the-money implied volatility (ATMI) of a European call
option. It is well known that the difference between these two quantities converges to zero as the time to maturity decreases. In this talk, we make use of a Malliavin calculus approach to derive an exact expression for this difference. This representation allows us to establish that the order of convergence is different in the correlated and uncorrelated cases, and that it depends on the behavior of the Malliavin derivative of the volatility process. In particular, we see that for volatilities driven by a fractional Brownian motion, this order depends on the corresponding Hurst parameter H. Moreover, in the case H ≥ 1/2, we develop a model-free approximation formula for the volatility swap in terms of the ATMI and its skew.
(Joint work with Kenichiro Shiraya)
Dr. Alvaro CARTEA (University of Oxford)
19th of November
Optimal Execution with Stochastic Delay
We show how traders use aggressive immediate execution limit orders (IELOs) to liquidate a position when there are random delays in all the steps of a trade, i.e., there is latency in the marketplace and latency is random. We frame our model as a delayed impulse control problem in which the trader controls the times and the price limit of the IELOs she sends to the exchange. Our paper is the first to study an optimal liquidation problem that accounts for: random delays, price impact, and transaction costs. We introduce a new type of impulse control problem with stochastic (or deterministic) delay, not previously studied in the literature. The value functions are characterised as the solution to a coupled system of a Hamilton-Jacobi-Bellman quasi-variational inequality (HJBQVI) and a partial differential equation. We use a Feynman-Kac representation to reduce the system to a HJBQVI, for which we prove existence and uniqueness in a viscosity sense. We employ foreign exchange high-frequency data to estimate model parameters and implement the random-latency-optimal strategy, and compare it with four benchmarks: executing the entire order at once, optimal execution with deterministic latency, optimal execution with zero latency, and time-weighted average price. For example, in the EUR/USD currency pair, we show that the random-latency-optimal strategy outperforms the benchmarks between 4 USD per million EUR traded and 105 USD per million EUR traded, this is between 0.15 and 18.18 times the value of the transaction fees paid by liquidity takers.
Authors: Alvaro Cartea and Leandro Sanchez-Betancourt
Dr. Giorgia CALLEGARO (University of Padova)
26th of November
No–Arbitrage Commodity Option Pricing with Market Manipulation
We design three continuous-time models in finite horizon of a
commodity price, whose dynamics can be affected by the actions of a
representative risk-neutral producer and a representative risk-neutral
trader. Depending on the model, the producer can control the drift
and/or the volatility of the price whereas the trader can at most
affect the volatility. The producer can affect the volatility in two
ways: either by randomizing her production rate or, as the trader,
using other means such as spreading false information. Moreover, the
producer contracts at time zero a fixed position in a European convex
derivative with the trader. The trader can be price-taker, as in the
first two models, or she can also affect the volatility of the
commodity price, as in the third model. We solve all three models
semi-explicitly and give closed-form expressions of the derivative
price over a small time horizon, preventing arbitrage opportunities to
arise. We find that when the trader is price-taker, the producer can
always compensate the loss in expected production profit generated by
an increase of volatility by a gain in the derivative position by
driving the price at maturity to a suitable level. Finally, in case
the trader is active, the model takes the form of a non-zero-sum
linear-quadratic stochastic differential game and we find that when
the production rate is already at its optimal stationary level, there
is an amount of derivative position that makes both players better off
when entering the game.
This is a joint work with René Aid and Luciano Campi.
Dr. Dasha LOUKIANOVA (University Evry-Paris Saclay)
3rd of December
Mean field limits for interacting Hawkes processes in a diffusive regime
We consider a sequence of systems of Hawkes processes having mean field interactions in a diffusive regime. The stochastic intensity of each process is a solution of a stochastic differential equation driven by N independent Poisson random measures. We show that, as the number of interacting components N tends to infinity, this intensity converges in distribution in Skorohod space to a CIR-type diffusion. Moreover, we prove the convergence in distribution of the Hawkes processes to the limit point process having the limit diffusion as intensity. To prove the convergence results, we use analytical technics based on the convergence of the associated infinitesimal generators and Markovian semigroups.
Joint work with Xavier Erny (Evry) et Eva Löcherbach (Paris 1).