Prospect theory is widely viewed as the best available descriptive model of how people evaluate risk in experimental settings. According to prospect theory, people are risk-averse with respect to gains and risk-seeking with respect to losses, a phenomenon called "loss aversion". Despite of the...

Motivated by the AIG bailout case in the financial crisis of 2007-2008, we consider an insurer who wants to maximize the expected utility of the terminal wealth by selecting optimal investment and risk control strategies. The insurer's risk process is modelled by a jump-diffusion process and is...

This paper is dedicated to the construction of high-order (in both space and time) finite-difference schemes for both forward and backward PDEs and PIDEs, such that option prices obtained by solving both the forward and backward equations are consistent. This approach is partly inspired by...

Stock prices will rarely follow the assumed model but, when stock's transaction times are dense in the interval $[t_0,T),$ they determine risk neutral probability (-ies) ${\cal P}^*$ for the stock price at time $T.$ The remaining available risk neutral probabilities at $T$ correspond to stock...

We study the continuous time portfolio optimization model on the market where the mean returns of individual securities or asset categories are linearly dependent on underlying economic factors. We introduce the functional $Q_\gamma$ featuring the expected earnings yield of portfolio minus a...

Based on the work of Suzuki (2002), we consider a generalization of Merton's asset valuation approach (Merton, 1974) in which two firms are linked by cross-ownership of equity and liabilities. Suzuki's results then provide no arbitrage prices of firm values, which are derivatives of exogenous...

The Black-Scholes implied volatility skew at the money of SPX options is known to obey a power law with respect to the time-to-maturity. We construct a model of the underlying asset price process which is dynamically consistent to the power law. The volatility process of the model is driven by a...

It is well known that combining multiple hedge fund alpha streams yields diversification benefits to the resultant portfolio. Additionally, crossing trades between different alpha streams reduces transaction costs. As the number of alpha streams increases, the relative turnover of the portfolio...

Much research in systemic risk is focused on default contagion. While this demands an understanding of valuation, fewer articles specifically deal with the existence, the uniqueness, and the computation of equilibrium prices in structural models of interconnected financial systems. However,...

This paper presents a novel adaptive-filter approach for predicting assets on the stock markets. Concepts are introduced here, which allow understanding this method and computing of the corresponding forecast. This approach is applied, as an example, through the prediction over the actual...