Canonical Correlation Analysis is a technique for finding pairs of basis vectors that maximise the correlation of a set of paired variables, these pairs can be considered as two views of the same object. This paper provides a stability analysis of Canonical Correlation Analysis by defining a pattern function that captures the degree to which the features from the two views are similar. We analy...

In existing pricing theories, pricing of single-name credit default swaps (CDSs) and their options makes no reference to the prices of defaultable bonds, the underlying assets of those derivatives. Such a pricing practice does not exclude possible arbitrage across bond and CDS markets. In this paper, we introduce a new theory that treats the two markets as one and thus ensures price consistency...

We analyze the problem of pricing and hedging contingent claims in a financial market described by a multi-period, discrete-time, finite-state scenario tree using an arbitrage-adjusted Sharpe-ratio criterion. We show that the writer’s and buyer’s pricing problems are formulated as conic convex optimization problems which allow to pass to dual problems over martingale measures and yield tighter ...

We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of ‘fat’ tails. An implied volatility ‘smile’ is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging. Accepted for publication in Risk Magazine (December 1995).

We use the Cox process (or a doubly stochastic Poisson process) to model the claim arrival process for catastrophic events. The shot noise process is used for the claim intensity function within the Cox process. The Cox process with shot noise intensity is examined by piecewise deterministic Markov process theory. We apply the model to price stop-loss catastrophe reinsurance contract and catast...

We present a methodology for modelling real world high frequency financial data. The methodology copes with the erratic arrival of data and is robust to additive outliers in the data set. Arbitrage pricing relationships are formulated into a linear state space representation. Arbitrage opportunities violate these pricing relationships and are analogous to multivariate additive outliers. Robust ...

Unlike derivatives of financial contracts, commodity options exhibit distinct particularities owing to physical aspects of the underlying. An adaptation of no-arbitrage pricing to this kind of derivative turns out to be a stress test, challenging the martingale-based models with diverse technical and technological constraints, with storability and short selling restrictions, and sometimes with ...