The effect of model and parameter misspecification on the effectiveness of Gaussian hedging strategies for derivative financial instruments is analyzed, showing that Gaussian hedges in the `natural'' hedging instruments are particularly robust. This is true for all models that imply...

We develop an eigenfunction expansion based value iteration algorithm to solve discrete time infinite horizon optimal stopping problems for a rich class of Markov processes that are important in applications. We provide convergence analysis for the value function and the exercise boundary, and...

We propose an efficient method to evaluate callable and putable bonds under a wide class of interest rate models, including the popular short rate diffusion models, as well as their time changed versions with jumps. The method is based on the eigenfunction expansion of the pricing operator....

Empirical skewness of asset returns can be reproduced by stochastic processes other than the Brownian motion with drift. Some authors have proposed the skew Brownian motion for pricing as well as interest rate modelling. Although the asymmetric feature of random return involved in the stock...

We construct a two-dimensional diffusion process with rank-dependent local drift and dispersion coëfficients, and with a full range of patterns of behavior upon collision that range from totally frictionless interaction, to elastic collision, to perfect reflection of one particle on the other....