Optimal stopping of strong Markov processes

We characterize the value function and the optimal stopping time for a large class of optimal stopping problems where the underlying process to be stopped is a fairly general Markov process. The main result is inspired by recent findings for Lévy processes obtained essentially via the Wiener–Hopf factorization. The main ingredient in our approach is the representation of the β$\beta$-excessive functions as expected suprema. A variety of examples is given.     

A Maximum Principle for Stochastic Control with Partial Information

Abstract

We study the problem of optimal control of a jump diffusion, that is, a process which is the solution of a stochastic differential equation driven by Lévy processes. It is required that the control process is adapted to a given subfiltration of the filtration generated by the underlying Lévy processes. We prove two maximum principles (one sufficient and one necessary) for this type of partial information control. The results are applied to a partial information mean-variance portfolio selection problem in finance.     

Optimal Approximation of the Second Iterated Integral of Brownian Motion

Abstract

In this article, a theorem is proved that describes the optimal approximation (in the L ²(?)-sense) of the second iterated integral of a standard two-dimensional Wiener process, W, by a function of finitely many elements of the Gaussian Hilbert space generated by W. This theorem has some interesting corollaries: First of all, it implies that Euler's method has the optimal rate of strong convergence among all algorithms that depend solely on linear functionals of the Wiener process, W; second, it shows that the approximation of the second iterated integral based on Karhunen–Loève expansion of the Brownian bridge is asymptotically optimal.     

q-Gaussians in the porous-medium equation: stability and time evolution

The stability of q-Gaussian distributions as particular solutions of the linear diffusion equation and its generalized nonlinear form, , the porous-medium equation, is investigated through both numerical and analytical approaches. An analysis of the kurtosis of the distributions strongly suggests that an initial q-Gaussian, characterized by an index q_i, approaches asymptotically the final, analytic solution of the porous-medium equation, characterized by an index q, in such a way that the relaxation rule for the kurtosis evolves in time according to a q-exponential, with a relaxation index q_rel ≡q_rel(q). In some cases, particularly when one attempts to transform an infinite-variance distribution (q_i ≥ 5/3) into a finite-variance one (q < 5/3), the relaxation towards the asymptotic solution may occur very slowly in time. This fact might shed some light on the slow relaxation, for some long-range-interacting many-body Hamiltonian systems, from long-standing quasi-stationary states to the ultimate thermal equilibrium state.     

Malliavin smoothness on the Lévy space with Hölder continuous or BV functionals

We consider Malliavin smoothness of random variables $f\left(X_1\right)$, where $X$ is a pure jump Lévy process and the function $f$ is either bounded and Hölder continuous or of bounded variation. We show that Malliavin differentiability and fractional differentiability of $f\left(X_1\right)$ depend both on the regularity of $f$ and the Blumenthal–Getoor index of the Lévy measure.     

Extinction time and the total mass of the continuous-state branching processes with competition

Consider a general continuous-state branching process with additional interaction, which destroys the branching property. We give precise conditions on the interaction term, in order to decide whether the extinction time of the process remains or not bounded as the initial value tends to infinity, and similarly for the total mass of the process.     

On pre-exit joint occupation times for spectrally negative Lévy processes

We adopt a new approach to find Laplace transforms of joint occupation times over disjoint intervals for spectrally negative Lévy processes. The Laplace transforms are expressed in terms of scale functions.     

Closed‐form approximations for spread options in Lévy markets

We provide new closed‐form approximations for the pricing of spread options in three specific instances of exponential Lévy markets, ie, when log‐returns are modeled as Brownian motions (Black‐Scholes model), variance gamma processes (VG model), or normal inverse Gaussian processes (NIG model). For the specific case of exchange options (spread options with zero strike), we generalize the well‐known Margrabe formula (1978) that is valid in a Black‐Scholes model to the VG model under a homogeneity assumption.