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A portfolio selection model is derived for diffusions where inequality constraints are imposed on portfolio security weights. Using the method of stochastic dynamic programming Hamilton–Jacobi–Bellman (HJB) equations are obtained for the problem of maximizing the expected utility of terminal...
Reducing the number of factors in a model by reducing the rank of a correlation matrix is a problem that often arises in finance, for instance in pricing interest rate derivatives with Libor market models. A simple iterative algorithm for correlation rank reduction is introduced, the eigenvalue...
Lévy processes can be used to model asset return's distributions. Monte Carlo methods must frequently be used to value path dependent options in these models, but Monte Carlo methods can be prone to considerable simulation bias when valuing options with continuous reset conditions. This paper...
Several numerical issues for valuing cliquet options using PDE methods are investigated. The use of a running sum of returns formulation is compared to an average return formulation. Methods for grid construction, interpolation of jump conditions, and application of boundary conditions are...
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