We define a regularized variant of the Dual Dynamic Programming algorithm called REDDP (REgularized Dual Dynamic Programming) to solve nonlinear dynamic programming equations. We extend the algorithm to solve nonlinear stochastic dynamic programming equations. The corresponding algorithm, called SDDP-REG, can be seen as an extension of a regularization of the Stochastic Dual Dynamic Programming...

Crisis may spread through economy via the propagating mechanisms of the labour market households becoming delinquent due to an initial unemployment shock may be unable to continue servicing obligations versus the financial system. With large debts e.g. mortgages such defaults pose a threat to financial system stability. In this paper we use the Polish household budget surveys to simulate the im...

We develop a price competition model for a new supply chain that competes in a market comprised of some rival supply chains. The new supply chain has one risk-neutral manufacturer and one risk-averse retailer in which the manufacturer is a leader and retailer is a follower. The manufacturer pays a fraction of the risk cost (caused by demand uncertainty) to the retailer. We apply this competitiv...

This paper proves that a simultaneously delta-neutral and gamma-neutral position can be established with the underlying asset and two options on the same asset, without any assumption on the underlying process of the asset price. This hedging strategy leads to the same fundamental partial differential equation as derived by Black and Scholes (1973), except that the variance function is the mark...

This paper provides new insights into the sources of bias of the implied by option prices volatility to forecast its physical counterpart. This bias can be attributed to the volatility risk premium effects. The latter are found to depend on the high order cumulants of the risk neutral density. These cumulants capture the risk averse behavior of the investors in the stock and option markets for ...

Option price data is often used to infer risk-neutral densities for future prices of an underlying asset. Given the prices of a set of options on the same underlying asset with different strikes and maturities, we propose a nonparametric approach for estimating the evolution of the risk-neutral density in time. Our method uses bicubic splines in order to achieve the desired smoothness for the e...

The common paradigm for risk-neutral real-option pricing is a special case encompassed within our general model for valuing investment opportunities. Risk-neutral real option prices deviate from the risk-averse real option values that apply in an incomplete market, giving different rankings of investment opportunities and different optimal exercise strategies. Unlike risk-neutral prices, more g...

Option price data is often used to infer risk-neutral densities for future prices of an underlying asset. Given the prices of a set of options on the same underlying asset with different strikes and maturities, we propose a nonparametric approach for estimating risk-neutral densities associated with several maturities. Our method uses bicubic splines in order to achieve the desired smoothness f...

Whereas a widely-held current view is that the correlation parameters occurring in the risk-neutral procedure for the pricing of basket credit derivatives should, at least in principle, be set equal to their real-world values obtained from historical data, the conclusion of this article is that the correlation parameters are risk-neutral parameters with a range of allowable values. As a result,...