'Pairs Trading' is an investment strategy used by many Hedge Funds. Consider two similar stocks which trade at some spread. If the spread widens short the high stock and buy the low stock. As the spread narrows again to some equilibrium value, a profit results. This paper provides an analytical...

Stochastic flows and their Jacobians are used to show why, when the short rate process is described by Gaussian dynamics, (as in the Vasicek or Hull-White models), or square root, affine (Bessel) processes, (as in the Cox-Ingersoll-Ross, or Duffie-Kan models), the bond price is an exponential...

Filtering and parameter estimation techniques from hidden Markov Models are applied to a discrete time asset allocation problem. For the commonly used mean-variance utility explicit optimal strategies are obtained.

The paper considers the continuous time pricing and hedging of European options in the presence of small transaction costs and frequent trading under local risk minimisation. The approach yields mean-self-financing strategies. The resulting dynamical hedges adapt the trading frequency in...

This paper demonstrates how to use distorted Gaussian copula functions to produce a heavy tailed portfolio loss distribution in the context of synthetic Collateralized Debt Obligations (CDOs). Distortion functions have not previously been used in this area. Hence, we demonstrate that it is...

We describe a novel physical application of the OctTree data structure [P. Meagher, Comput. Graphics Image Process 19(2) (1982) 129–147] in a dynamically tessellating algorithm, in conjunction with an object-oriented, constructive solid geometry library (DOC), to efficiently determine pore...