Numerical Methods for Finance (Chapman & Hall Crc Financial Mathematics Series)

312 Pages·2007·4.02 MB·English

by  John Miller

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Chapman & Hall/CRC
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Library of Congress Cataloging-in-Publication Data
Miller, John (John James Henry), 1937-
Numerical methods for finance / John Miller and David Edelman.
p. cm. -- (Financial mathematics series)
Papers presented at a conference.
Includes bibliographical references and index.
ISBN-13: 978-1-58488-925-0 (alk. paper)
ISBN-10: 1-58488-925-X (alk. paper)
1. Finance--Mathematical models--Congresses. I. Edelman, David. II. Title.
III. Series.
HG106.M55 2007
332.01’5195--dc22 2007014372
Visit the Taylor & Francis Web site at
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and the CRC Press Web site at
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Contents
Preface......................................................vii
ListofContributors...........................................ix
AbouttheEditors............................................xiii
Sponsors.....................................................xv
CHAPTER 1 (cid:2) CoherentMeasuresofRiskintoEveryday
MarketPractice.................................1
CarloAcerbi
CHAPTER 2 (cid:2) PricingHigh-DimensionalAmericanOptions
UsingLocalConsistencyConditions.............13
S.J.BerridgeandJ.M.Schumacher
CHAPTER 3 (cid:2) AdverseInterriskDiversificationEffects
forFXForwards...............................53
ThomasBreuerandMartinJandaˇcka
CHAPTER 4 (cid:2) CounterpartyRiskPricingunderCorrelation
betweenDefaultandInterestRates...............63
DamianoBrigoandAndreaPallavicini
CHAPTER 5 (cid:2) OptimalDynamicAssetAllocationfor
DefinedContributionPensionPlans.............83
AndrewJ.G.Cairns,DavidBlake,andKevinDowd
CHAPTER 6 (cid:2) OnHigh-PerformanceSoftwareDevelopment
fortheNumericalSimulationofLife
InsurancePolicies..............................87
S.Corsaro,P.L.DeAngelis,Z.Marino,andF.Perla
CHAPTER 7 (cid:2) AnEfficientNumericalMethodforPricing
InterestRateSwaptions........................113
MarkCumminsandBernardMurphy
v
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vi (cid:2) CONTENTS
CHAPTER 8 (cid:2) EmpiricalTestingofLocalCrossEntropyasa
MethodforRecoveringAsset’sRisk-Neutral
PDFfromOptionPrices.......................149
Vladim´ırDobia´ˇs
CHAPTER 9 (cid:2) UsingIntradayDatatoForecastDaily
Volatility:AHybridApproach..................173
DavidC.EdelmanandFrancescoSandrini
CHAPTER10 (cid:2) PricingCreditfromtheTopDownwith
AffinePointProcesses.........................195
EymenErrais,KayGiesecke,andLisaR.Goldberg
CHAPTER11 (cid:2) ValuationofPerformance-DependentOptions
inaBlack–ScholesFramework ................. 203
ThomasGerstner,MarkusHoltz,andRalfKorn
CHAPTER12 (cid:2) VarianceReductionthroughMultilevel
MonteCarloPathCalculations.................215
MichaelB.Giles
CHAPTER13 (cid:2) ValueatRiskandSelf-Similarity................225
OlafMenkens
CHAPTER14 (cid:2) ParameterUncertaintyinKalman-Filter
EstimationoftheCIRTerm-StructureModel....255
ConallO’Sullivan
CHAPTER15 (cid:2) EDDIEforDiscoveringArbitrage
Opportunities................................281
EdwardTsang,SheriMarkose,AlmaGarcia,andHakanEr
Index ...................................................... 285
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Preface
This volume contains a refereed selection of papers, which were first
presented at the international conference on Numerical Methods for
FinanceheldinDublin,IrelandinJune2006andwerethensubmitted
forpublication.Therefereeingprocedurewascarriedoutbymembers
of the International Steering Committee, the Local Organizing Com-
mitteeandtheEditors.
The aim of the conference was to attract leading researchers, both
practitioners and academics, to discuss new and relevant numerical
methodsforthesolutionofpracticalproblemsinfinance.
The conference was held under the auspices of the Institute for
Numerical Computation and Analysis, a non-profit company limited
byguarantee;seehttp://www.incaireland.orgformoredetails.
It is a pleasure for us to thank the members of the International
SteeringCommittee:
ElieAyache(ITO33,Paris,France)
PhelimBoyle(UniversityofWaterloo,Ontario,Canada)
RamaCont(EcolePolytechnique,Palaiseau,France)
PaulGlasserman(ColumbiaUniversity,NewYork,USA)
SamHowison(UniversityofOxford,UK)
JohnJ.H.Miller(INCA,Dublin,Ireland)
HaraldNiederreiter(NationalUniversityofSingapore)
EckhardPlaten(UniversityofTechnologySydney,Australia)
WilSchilders(Philips,Eindhoven,Netherlands)
HansSchumacher(TilburgUniversity,Netherlands)
RuedigerSeydel(UniversityofCologne,Germany)
TonVorst(ABN-AMRO,Amsterdam,Netherlands)
PaulWilmott(WilmottAssociates,London,UK)
LixinWu(UniversityofScience&Technology,HongKong,China)
andthemembersoftheLocalOrganizingCommittee:
JohnA.D.Appleby(DublinCityUniversity)
NikolaiDokuchaev(UniversityofLimerick)
vii
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viii (cid:2) PREFACE
DavidC.Edelman(SmurfitBusinessSchool,Dublin)
PeterGorman(CharteredAccountant,Dublin)
BernardHanzon(UniversityCollegeCork)
FrankMonks(NexgenCapital,Dublin)
FrankOertel(UniversityCollegeCork)
ShaneWhelan(UniversityCollegeDublin)
Inaddition,wewishtothankoursponsors,withouttheirenthusiasm
andpracticalhelp,thisconferencewouldnothavesucceeded.
TheEditors
JohnA.D.Appleby
DavidC.Edelman
JohnJ.H.Miller
Dublin,Ireland
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List of Contributors
CarloAcerbi DamianoBrigo
Abaxbank CreditModels-BancaIMICorso
CorsoMonforte34,20122Milano Matteotti6
20121Milano,Italy
P.L.DeAngelis
UniversityofNaplesParthenope
AndrewJ.G.Cairns
ViaMedina
MaxwellInstitute
40-80133Naples,Italy
Edinburgh
S.J.Berridge ActuarialMathematics
ManInvestments andStatistics
SugarQuay, Heriot-WattUniversity
LowerThamesSt Edinburgh,EH144AS,
LondonEC3R6DU UnitedKingdom
DavidBlake
S.Corsaro
PensionsInstitute
UniversityofNaplesParthenope
CassBusinessSchool
ViaMedina
CityUniversity
40-80133Naples,Italy
106BunhillRow,London,EC1Y
8TZ,UnitedKingdom.
KevinDowdCentreforRisk& MarkCummins
InsuranceStudies Dept.Accounting&Finance
NottinghamUniversityBusiness KemmyBusinessSchool
School UniversityofLimerick
JubileeCampus,Nottingham,NG8
StefaniaCorsaro
1BB,UnitedKingdom
UniversityofNaplesParthenope
ThomasBreuer ViaMedina
PPEResearchCentre 40-80133Naples,Italy
FHVorarlberg,
Hochschulstrasse1,A-6850 Vladim´ırDobia´sˇ
Dornbirn UniversityCollegeDublin
ix