Thursday, February 25, 2010

A day to remember

Days don't come much more memorable than yesterday.

Stan Pliska concluded his guest lectures with the end of the Harrison-Pliska story and a comprehesive overview of Optimal Portfolio Theory, from Markowitz to Merton and beyond, complete with empirical results illustrating the advantages and disadvantages of the different approaches.

Later in the day, Raphael Douady, himself an olympian, used his talk in the Quantitative Finance Seminar Series to explain how to evaluate the risk of a hedge fund using a herculean risk measure based on nonlinear factor models - the StressVaR.

And of course Team Canada beat Russia for the first time in 50 years!

Tuesday, February 23, 2010

Power play

Coinciding with an Olympics-related family discussion that we had yesterday on the meaning of the expression power play, we had a long and informative talk today by Vladimir Vinogradov about the Power-Variance Family - a rich class of processes that can be used to model equity prices.

And on a completely unrelated note, via Brad DeLong, I can't avoid noticing that John Cochrane is sounding weirder and weirder by the day. In my formative years I attempted to read his Asset Pricing book and gave up thinking it was simply badly written, but it is becoming obvious that the confusing and obscure writing style is merely a reflection of a muddled world view.

Monday, February 22, 2010

The return of excitment

And by that I mean: finally there is snow on the ground again !

More generally, many new visitors arrived today. Sebastiano Silla will be working with me on insurance problems and participate in the program until June, Rudra Jena will work with Tom Hurd on systemic risk and visit for a month and Vladimir Vinogradov will give a talk in the Visitor's seminar tomorrow. So it definitely felt like the program was in full swing again after a relatively quiet month.

Thursday, February 18, 2010

Straight from the horse's mouth

Stan Pliska gave the first of two guest lectures in my graduate course  yesterday by covering an enourmous amount of material in a commented tour of option pricing history from the Middle Ages to the 1980s.

As I mentioned in my September 09 Fields Notes article, I always knew that the Harrison and Pliska paper had opened the flood gates for the use of  sophisticated stochastic analysis in finance, thereby more or less starting the discipline of mathematical finance as we know it. What I didn't know was how deliberate this was, to the extent that Stan, Mike Harrison and Rick Durrett (another hero of mine for completely different reasons stemming from the time I was working in statistical mechanics) had formed a reading group in 1980 specifically to study the work done in semimartingales and stochastic integration by the French school of probability (a la Dellacherie and Meyer).

It was delightful to hear all this and much more from Stan, and we look forward to his second lecture next week.

Tuesday, February 16, 2010

Demo or die

Publish or perish used to be the standard for academic promotion and still describes the career path in the majority of disciplines. In some areas however, most notably computer science, it is not enough to publish papers with the solution of a problem - one also needs to demonstrate that the solution actually works in the real world.

I think computational finance is also one of these areas, and borrowing a phrase from the performing arts, I would like to propose that its standard should be demo or die.

All this came to my mind at today's seminar talk by Vladimir Surkov, who together with Sebastian Jaimungal and Ken Jackson developed a method for calculating option prices called Fourier Space-Time stepping (FST for short). Now these guys can publish and demo !

Wednesday, February 10, 2010

Silence period

My loyal readers (all 3 of them !) will surely have noticed that it has been a full week since my last post. To them I say - don't despair, this blog will go on ...

But seriously now, the reason for the silence is that we are still in the midst of the quiet period at the thematic program that I had predicted a few weeks ago. Since my last post, we had two more lectures for each of the graduate courses and two more talks in the visitors seminar series featuring Xianhua Peng and Andreas E. Kyprianou, which unfortunately I could not attend because of an external scheduling conflict.

The background organizational work continues at full speed thou (upcoming seminars, new sponsors, guest-editing for special journal issues, etc...), but is not exciting enough to make these pages.

Oh, and against best advice, I also got embroiled in an internal mailing list discussion with some hard core global warming deniers at my home institution, so that has consumed valuable time as well (must remember not to do that again in the future).

Wednesday, February 3, 2010

Visitor Seminars launched

We had two of our postdocs giving the first talks in our Visitor Seminars yesterday.

Hao Xing spoke about stochastic volatility models where (discounted) stock prices are local martingales under the risk neutral measure and showed how derivative prices (solutions of the pricing PDE) can fail to be unique when the stock price is not an actual martingale. One of the motivations for studying this kind of things are models where asset bubbles are identified precisely with such strict local martingales.

Klaas Schulze showed how the idea of an indifferent level of risk aversion can be used to define the actual riskiness of a position. This is inspired by the tongue-in-cheek comment that "risk is what risk-averters hate" and leads to a lot of neat mathematics related to the notion of dual risk measures.

A very promising start for these seminars indeed.

Monday, February 1, 2010

Canadian Banks

Paul Krugman uses Canadian banks as an example for the "hollowness of the conventional wisdom of the moment" and quotes regulation, regulation, regulation as the source of financial stability in Canada.

Of course we knew that all along. In fact we used the stability of the Canadian banking systems as the opening paragraph in our sponsorship brochure. The surprising thing for us is that none of the five big banks that Krugman talks about has committed to being a sponsor for our thematic program so far, but we keep hoping.

Update: Krugman further elaborates on the soundness of the Canadian system here. Maybe not spending money in an exciting program like ours is part of being "good and boring".