The Ornstein–Uhlenbeck bridge and applications to Markov semigroups

For an arbitrary Hilbert space-valued Ornstein–Uhlenbeck process we construct the Ornstein–Uhlenbeck bridge connecting a given starting point x$x$ and an endpoint y$y$ provided y$y$ belongs to a certain linear subspace of full measure. We derive also a stochastic evolution equation satisfied by the OU bridge and study its basic properties. The OU bridge is then used to investigate the Markov transition semigroup defined by a stochastic evolution equation with additive noise. We provide an explicit formula for the transition density and study its regularity. These results are applied to show some basic properties of the transition semigroup. Given the strong Feller property and the existence of invariant measure we show that all L^p$L^p$ functions are transformed into continuous functions, thus generalising the strong Feller property. We also show that transition operators are q$q$-summing for some q>p>1$q>p>1$, in particular of Hilbert–Schmidt type.     

A strategy based on mean reverting property of markets and applications to foreign exchange trading with trailing stops

We propose a strategy for automated trading, outline theoretical justification of the profitability of this strategy, and overview the backtesting results in application to foreign currencies trading. The proposed methodology relies on the assumption that processes reflecting the dynamics of currency exchange rates are in a certain sense similar to the class of Ornstein–Uhlenbeck processes and exhibit the mean reverting property. In order to describe the quantitative characteristics of the projected return of the strategy, we derive the explicit expression for the running maximum of the Ornstein–Uhlenbeck process stopped at maximum drawdown and look at the correspondence between derived characteristics and the observed ones. Copyright © 2017 John Wiley & Sons, Ltd.     

Multifractal models via products of geometric OU-processes: Review and applications

This paper reviews a class of multifractal models obtained via products of exponential Ornstein–Uhlenbeck processes driven by Lévy motion. Given a self-decomposable distribution, conditions for constructing multifractal scenarios and general formulas for their Renyi functions are provided. Together with several examples, a model with multifractal activity time is discussed and an application to exchange data is presented.     

Asymptotic Solutions of Viscous Hamilton–Jacobi Equations with Ornstein–Uhlenbeck Operator

We study the long time behavior of solutions of the Cauchy problem for semilinear parabolic equations with the Ornstein–Uhlenbeck operator in ? ^N . The long time behavior in the main results is stated with help of the corresponding to ergodic problem, which complements, in the case of unbounded domains, the recent developments on long time behaviors of solutions of (viscous) Hamilton–Jacobi equations due to Namah (1996 Namah , G. ( 1996 ). Asymptotic solution of a Hamilton–Jacobi equation . Asymptotic Anal. 12 ( 4 ): 355 – 370 . [CSA] [Web of Science ®] , [Google Scholar]), Namah and Roquejoffre (1999 Namah , G. , Roquejoffre , J.-M . ( 1999 ). Remarks on the long-time behavior of the solutions of Hamilton–Jacobi equations . Comm. PDE 24 ( 5–6 ): 883 – 893 . [CSA] [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]), Roquejoffre (1998 Roquejoffre , J.-M . ( 1998 ). Comportement asymptotique des solutions d’équations de Hamilton–Jacobi monodimensionnelles . C. R. Acad. Sci. Paris Sér. I Math. 326 ( 2 ): 185 – 189 . [CSA] [Crossref] , [Google Scholar]), Fathi (1998 Fathi , A. ( 1998 ). Sur la convergence du semi-groupe de Lax–Oleinik semigroup . C. R. Acad. Sci. Paris Sér. I Math. 327 ( 3 ): 267 – 270 . [CSA] [Crossref] , [Google Scholar]), Barles and Souganidis (2000 Barles , G. , Souganidis , P. E. ( 2000 ). On the large time behavior of solutions of Hamilton–Jacobi equaitons . SIAM J. Math. Anal. 31 ( 4 ): 925 – 939 . [CSA] [CROSSREF] [Crossref], [Web of Science ®] , [Google Scholar] 2001 Barles , G. , Souganidis , P. E. ( 2001 ). Space-time periodic solutions and long-time behavior of solutions to quasi-periodic parabolic equations . SIAM J. Math. Anal. 32 ( 6 ): 1311 – 1323 . [CSA] [CROSSREF] [Crossref], [Web of Science ®] , [Google Scholar]). We also establish existence and uniqueness results for solutions of the Cauchy problem and ergodic problem for semilinear parabolic equations with the Ornstein–Uhlenbeck operator.     

Parametric estimation for linear stochastic differential equations driven by mixed fractional Brownian motion

ABSTRACT

We investigate the asymptotic properties of the maximum likelihood estimator and Bayes estimator of the drift parameter for stochastic processes satisfying linear stochastic differential equations driven by a mixed fractional Brownian motion. We obtain a Bernstein–von Mises-type theorem also for such a class of processes.     

MARKET FORCES AND DYNAMIC ASSET PRICING

We study a dynamic model of asset pricing which is driven by two characteristic market features: the law of investor demand (e.g., “buy low, sell high”) and the law of the market institution (which codifies the trading rules under which the market operates). We demonstrate in a simple investor–specialist trading market that these features are sufficient to guarantee an equilibrium where investors' trading strategies and the specialist's rule of price adjustments are best responses to each other. The drift term appearing in the resulting equation of the asset price process may be interpreted using Newtonian mechanics as the acceleration of a “market force.” If either of the market participants is risk-neutral, the result leads to risk-neutral asset pricing (e.g., the Black and Scholes option pricing formula).     

Weighted Hardy's inequality and the Kolmogorov equation perturbed by an inverse-square potential

In this article, we give necessary and sufficient conditions for the existence of a weak solution of a Kolmogorov equation perturbed by an inverse-square potential. More precisely, using a weighted Hardy's inequality with respect to an invariant measure μ, we show the existence of the semigroup solution of the parabolic problem corresponding to a generalized Ornstein–Uhlenbeck operator perturbed by an inverse-square potential in L ²(? ^N ,?μ). In the case of the classical Ornstein–Uhlenbeck operator we obtain nonexistence of positive exponentially bounded solutions of the parabolic problem if the coefficient of the inverse-square function is too large.     

Ornstein–Uhlenbeck processes time changed with additive subordinators and their applications in commodity derivative models

We characterize Ornstein–Uhlenbeck processes time changed with additive subordinators as time-inhomogeneous Markov semimartingales, based on which a new class of commodity derivative models is developed. Our models are tractable for pricing European, Bermudan and American futures options. Calibration examples show that they can be better alternatives than those developed in Li and Linetsky (2012)  [6]. Our method can be applied to many other processes popular in various areas besides finance to develop time-inhomogeneous Markov processes with desirable features and tractability.     

A Non‐Gaussian Ornstein–Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing

A mean‐reverting model is proposed for the spot price dynamics of electricity which includes seasonality of the prices and spikes. The dynamics is a sum of non‐Gaussian Ornstein–Uhlenbeck processes with jump processes giving the normal variations and spike behaviour of the prices. The amplitude and frequency of jumps may be seasonally dependent. The proposed dynamics ensures that spot prices are positive, and that the dynamics is simple enough to allow for analytical pricing of electricity forward and futures contracts. Electricity forward and futures contracts have the distinctive feature of delivery over a period rather than at a fixed point in time, which leads to quite complicated expressions when using the more traditional multiplicative models for spot price dynamics. In a simulation example it is demonstrated that the model seems to be sufficiently flexible to capture the observed dynamics of electricity spot prices. The pricing of European call and put options written on electricity forward contracts is also discussed.