# Stochastics and Finance Seminar

The seminar will be held on Tuesday 3:10-4:30 pm in Wilkinson Seminar Room 231, unless otherwise specified.

## 2019 Semester 1

### Tuesday, May 28, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Edward Kim (University of Sydney, School of Mathematics and Statistics)

Title: BSDEs driven by discontinuous martingales

Abstract:

We prove some new results on BSDEs, reflected BSDEs, and doubly reflected BSDEs driven by a multi-dimensional discontinuous martingale. We generalize the setups studied by Peng and Xu (2009) and Quenez, Grigorova, Sulem and Dumitrescu (2018) who dealt with BSDEs driven by a one-dimensional Brownian motion and a purely discontinuous martingale with a single jump. Our results are not covered by existing results on BSDEs driven by a Brownian motion and a Poisson random measure.

### Tuesday, May 21, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Prof Ben Goldys (University of Sydney, School of Mathematics and Statistics)

Title: On the existence of stochastic flows

Abstract:

An important question in the theory of stochastic (ordinary and partial) differential equations is about the existence and regularity of the stochastic flow associated to solutions of the equation. It has been studied by many authors, including Elworthy, Flandoli, Malliavin, Bismut, Ikeda and Watanabe, and Kunita. It is still a major open problem in the case of stochastic PDEs and even for ordinary stochastic differential equations many questions remain unanswered. In this talk I will discuss the difficulties arising in the case of stochastic PDEs and present some partial answers. This is a joint work with Szymon Peszat.

### Tuesday, May 14, 3:10 pm, Wilkinson Seminar Room 231

Speaker: James Yang (University of Sydney, School of Mathematics and Statistics)

Title: Singular Perturbation of Zero-sum Linear-Quadratic Stochastic Differential Games

Abstract:

We develop a framework for zero-sum linear-quadratic stochastic differential games on a finite time horizon governed by multiscale state equations. The multiscale nature of the problem can be leveraged to reformulate the associated generalised Riccati equation in terms of a deterministic singular perturbation problem. In doing so, we can show that, for small enough $$\epsilon$$, the existence of solution to the associated generalised Riccati equation is guaranteed by the existence of a solution to a decoupled pair of differential and algebraic Riccati equations with a reduced order of dimensionality. Furthermore, we construct two asymptotic estimates to the closed-loop value of the game. The first is by constructing an approximate closed-loop strategy and the second is by observing the limiting value as $$\epsilon$$ goes towards zero. This is a joint work with Ben Goldys and Zhou Zhou.

### Tuesday, April 30, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Dr Anna Aksamit (University of Sydney, School of Mathematics and Statistics)

Title: The Robust Pricing–Hedging Duality for American Options in Discrete Time Financial Markets (Part II)

Abstract:

We investigate the pricing–hedging duality for American options in discrete time financial models where some assets are traded dynamically and others, for example, a family of European options, only statically. In the second part of the paper, we study two important examples of the robust framework: the setup of Bouchard and Nutz and the martingale optimal transport setup of Beiglböck, Henry-Labordère, and Penkner, and show that our general results apply in both cases and enable us to obtain the pricing-hedging duality for American options. This is joint work with Shuoqing Deng, Jan Obłój and Xiaolu Tan.

### Tuesday, April 23, 3:10 pm, Your favourite beach or park

Easter break

Abstract: Partly cloudy. Medium (50%) chance of showers in the afternoon and evening. Light winds.

### Tuesday, April 16, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Prof Marek Rutkowski (University of Sydney, School of Mathematics and Statistics)

Title: Valuation under Credit Risk, Margins and Funding Costs (Part II)

Abstract:

We present a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication approach to a generality that has not yet been studied previously and reaching valuation when replication is not assumed. We show that this unifying theoretical framework clarifies the relationship between the two valuation approaches: the so-called adjusted cash flows approach and the classic replication approach. In particular, results of this work cover most previous papers where the authors studied specific replication-based models. This is joint work with Damiano Brigo, Cristin Buescu, Marco Francischello and Andrea Pallavicini.

### Tuesday, April 9, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Prof Marek Rutkowski (University of Sydney, School of Mathematics and Statistics)

Title: Valuation under Credit Risk, Margins and Funding Costs (Part I)

Abstract:

We develop a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication-based approach to a generality that has not yet been studied previously and reaching valuation when replication is not assumed. We first discuss practical issues motivating our research and we stress that the classic approach is not suitable when dealing with over-the-counter collateralized contracts under differential funding costs. This is joint work with Damiano Brigo, Cristin Buescu, Marco Francischello and Andrea Pallavicini.

### Tuesday, April 2, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Dr Anna Aksamit (University of Sydney, School of Mathematics and Statistics)

Title: The Robust Pricing–Hedging Duality for American Options in Discrete Time Financial Markets (Part I)

Abstract:

We investigate the pricing–hedging duality for American options in discrete time financial models where some assets are traded dynamically and others, for example, a family of European options, only statically. In the first part of the paper, we consider an abstract setting, which includes the classical case with a fixed reference probability measure as well as the robust framework with a nondominated family of probability measures. Our first insight is that, by considering an enlargement of the space, we can see American options as European options and recover the pricing-hedging duality, which may fail in the original formulation. This can be seen as a weak formulation of the original problem. Our second insight is that a duality gap arises from the lack of dynamic consistency, and hence that a different enlargement, which reintroduces dynamic consistency is sufficient to recover the pricing–hedging duality. We show that it is enough to consider fictitious extensions of the market in which all the assets are traded dynamically. This is joint work with Shuoqing Deng, Jan Obłój and Xiaolu Tan.

### Tuesday, March 26, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Dr Zhou Zhou (University of Sydney, School of Mathematics and Statistics)

Title: Transport Plans with Domain Constraints (Part II)

Abstract:

This talk is the second part of my presentation commenced on March 12. I will first recall the main results presented in the first part. Subsequently, I will focus on the optimal transport problem with constraints and obtain the Kantorovich duality. A corollary of this result is a monotonicity principle, which gives us a geometric way of identifying the optimizer.

### Tuesday, March 19, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Prof Marek Musiela (University of Oxford and Oxford-Man Institute of Quantitative Finance)

Title: Multivariate Fractional Brownian Motion and Generalizations of SABR Model

Abstract:

SABR is a generalization of the Black and Scholes model which was adopted as the market standard for quoting cap and swaption volatilities. At the time it fitted the market relatively well. Its success was driven by the approximate formula for implied volatility developed by Pat Hagan. More recently, SABR was applied to price equity and FX options. This generated new challenges for the SABR framework and suggested a new class of models inspired by SABR, where the process defining the noise is a bivariate fractional Brownian motion with parameter $$(1/2, H)$$. In the classical SABR, the correlation parameter between the two Brownian motions determines many of its mathematical properties. In the modified SABR, a Brownian motion defining the dynamics of stochastic volatility is replaced by a fractional Brownian motion. This leads to the question how one should define the dependence structure between the Brownian motion driving the asset dynamics and the fractional Brownian motion used to define the volatility. In this talk, I propose dependence structure implicit to the definition of multivariate fractional Brownian motion with multivariate self-similarity parameter $$H$$. I also consider the consequences and suggest further modifications.

### Tuesday, March 12, 3:10 pm, Wilkinson Seminar Room 231

Speaker: Dr Zhou Zhou (University of Sydney, School of Mathematics and Statistics)

Title: Transport Plans with Domain Constraints (Part I)

Abstract:

Let $$\Omega$$ be one of $$\mathbb{X}^{N+1},C[0,1],D[0,1]$$: product of Polish spaces, space of continuous functions from $$[0,1]$$ to $$\mathbb{R}^d$$, and space of RCLL (right-continuous with left limits) functions from $$[0,1]$$ to $$\mathbb{R}^d$$, respectively. We first consider the existence of a probability measure $$P$$ on $$\Omega$$ such that $$P$$ has the given marginals $$\alpha$$ and $$\beta$$ and its disintegration $$P_x$$ must be in some fixed $$\Gamma(x)\subset \mathfrak{P}(\Omega)$$, where $$\mathfrak{P}(\Omega)$$ is the set of probability measures on $$\Omega$$. The main application we have in mind is the martingale optimal transport problem in mathematical finance when the martingales are assumed to have bounded volatility/quadratic variation. We show that such probability measure exists if and only if the $$\alpha$$ average of the so-called $$G$$-expectation of bounded continuous functions with respect to the measures in $$\Gamma$$ is less than their $$\beta$$ average. As a byproduct, we get a necessary and sufficient condition for the Skorokhod embedding for bounded stopping times. This is joint work with Erhan Bayraktar and Xin Zhang.