In the econometrics of financial time series, it is customary to take some parametric model for the data, and then estimate the parameters from historical data. This approach suffers from several problems. Firstly, how is estimation error to be quant
ified, and then taken into account when making statements about the future behaviour of the observed time series? Secondly, decisions may be taken today committing to future actions over some quite long horizon, as in the trading of derivatives; if the model is re-estimated at some intermediate time, our earlier decisions would need to be revised - but the derivative has already been traded at the earlier price. Thirdly, the exact form of the parametric model to be used is generally taken as given at the outset; other competitor models might possibly work better in some circumstances, but the methodology does not allow them to be factored into the inference. What we propose here is a very simple (Bayesian) alternative approach to inference and action in financial econometrics which deals decisively with all these issues. The key feature is that nothing is being estimated.
This paper sets up a methodology for approximately solving optimal investment problems using duality methods combined with Monte Carlo simulations. In particular, we show how to tackle high dimensional problems in incomplete markets, where traditional methods fail due to the curse of dimensionality.
The potential approach is a general and simple method for modelling interest rates, foreign exchange rates, and in principle other types of financial assets. This paper takes data on some liquid interest rate derivatives, and fits potential models us
ing a small finite-state Markov chain as the base Markov process.
This paper approaches the definition and properties of dynamic convex risk measures through the notion of a family of concave valuation operators satisfying certain simple and credible axioms. Exploring these in the simplest context of a finite time
set and finite sample space, we find natural risk-transfer and time-consistency properties for a firm seeking to spread its risk across a group of subsidiaries.
