pwc-archive/papers-with-abstracts huggingface dataset:
Beyond the Leland strategies
Authors: Emmanuel Lepinette, Amal Omrani
Date: 2025-03-04 00:00:00

In the Black and Scholes model with proportional transaction costs, the Leland strategy allows to asymptotically super-replicate the European Call option as the number of revision dates converges to + infinity and the transaction costs rate tends rapidly to 0. This method relies heavily on the explicit expression of the delta-hedging strategy in the Black and Scholes model where the volatility is enlarged to compensate for the transaction costs. We solve the same problem of super-hedging but for a general model with an arbitrary fixed number of revision dates and arbitrary fixed transaction costs rates. Moreover, our approach does not need the existence of a risk-neutral probability measure and is (almost) model free and easily implementable from real data.
Numerical methods for two-dimensional G-heat equation
Authors: Z. T. Pei, X. Y. Yue, X. T. Zheng
Date: 2025-03-04 00:00:00

The G-expectation is a sublinear expectation. It is an important tool for pricing financial products and managing risk thanks to its ability to deal with model uncertainty. The problem is how to efficiently quantify it since the commonly used Monte Carlo method does not work. Fortunately, the expectation of a G-normal random variable can be linked to the viscosity solution of a fully nonlinear G-heat equation. In this paper, we propose a novel numerical scheme for the two-dimensional G-heat equation and pay more attention to the case that there exists uncertainty on the correlationship, especially to the case that the correlationship ranges from negative to positive. The scheme is monotonic, stable, and convergent. The numerical tests show that the scheme is highly efficient.
The Volterra Stein-Stein model with stochastic interest rates
Authors: Eduardo Abi Jaber, Donatien Hainaut, Edouard Motte
Date: 2025-03-03 00:00:00

We introduce the Volterra Stein-Stein model with stochastic interest rates, where both volatility and interest rates are driven by correlated Gaussian Volterra processes. This framework unifies various well-known Markovian and non-Markovian models while preserving analytical tractability for pricing and hedging financial derivatives. We derive explicit formulas for pricing zero-coupon bond and interest rate cap or floor, along with a semi-explicit expression for the characteristic function of the log-forward index using Fredholm resolvents and determinants. This allows for fast and efficient derivative pricing and calibration via Fourier methods. We calibrate our model to market data and observe that our framework is flexible enough to capture key empirical features, such as the humped-shaped term structure of ATM implied volatilities for cap options and the concave ATM implied volatility skew term structure (in log-log scale) of the S&P 500 options. Finally, we establish connections between our characteristic function formula and expressions that depend on infinite-dimensional Riccati equations, thereby making the link with conventional linear-quadratic models.
Pricing time-capped American options using Least Squares Monte Carlo method
Authors: Paweł Stȩpniak, Zbigniew Palmowski
Date: 2025-03-02 00:00:00

In this paper, we adopt the least squares Monte Carlo (LSMC) method to price time-capped American options. The aforementioned cap can be an independent random variable or dependent on asset price at random time. We allow various time caps. In particular, we give an algorithm for pricing the American options capped by the first drawdown epoch. We focus on the geometric L\'evy market. We prove that our estimator converges to the true price as one takes the discretisation step tending to zero and the number of trajectories going to infinity.
Strong Solutions and Quantization-Based Numerical Schemes for a Class of Non-Markovian Volatility Models
Authors: Martino Grasselli, Gilles Pagès
Date: 2025-02-28 00:00:00
Tasks: Quantization

We investigate a class of non-Markovian processes that hold particular relevance in the realm of mathematical finance. This family encompasses path-dependent volatility models, including those pioneered by [Platen and Rendek, 2018] and, more recently, by [Guyon and Lekeufack, 2023], as well as an extension of the framework proposed by [Blanc et al., 2017]. Our study unfolds in two principal phases. In the first phase, we introduce a functional quantization scheme based on an extended version of the Lamperti transformation that we propose to handle the presence of a memory term incorporated into the diffusion coefficient. For scenarios involving a Brownian integral in the diffusion term, we propose alternative numerical schemes that leverage the power of marginal recursive quantization. In the second phase, we study the problem of existence and uniqueness of a strong solution for the SDEs related to the examples that motivate our study, in order to provide a theoretical basis to correctly apply the proposed numerical schemes.
N-player and mean field games among fund managers considering excess logarithmic returns
Authors: Guohui Guan, Jiaqi Hu, Zongxia Liang
Date: 2025-03-04 00:00:00

This paper studies the competition among multiple fund managers with relative performance over the excess logarithmic return. Fund managers compete with each other and have expected utility or mean-variance criteria for excess logarithmic return. Each fund manager possesses a unique risky asset, and all fund managers can also invest in a public risk-free asset and a public risk asset. We construct both an $n$-player game and a mean field game (MFG) to address the competition problem under these two criteria. We explicitly define and rigorously solve the equilibrium and mean field equilibrium (MFE) for each criteria. In the four models, the excess logarithmic return as the evaluation criterion of the fund leads to the { allocation fractions} being constant. The introduction of the public risky asset yields different outcomes, with competition primarily affecting the investment in public assets, particularly evident in the MFG. We demonstrate that the MFE of the MFG represents the limit of the $n$-player game's equilibrium as the competitive scale $n$ approaches infinity. Finally, the sensitivity analyses of the equilibrium are given.
Consumption-portfolio choice with preferences for liquid assets
Authors: Guohui Guan, Jiaqi Hu, Zongxia Liang
Date: 2025-03-04 00:00:00

This paper investigates an infinite horizon, discounted, consumption-portfolio problem in a market with one bond, one liquid risky asset, and one illiquid risky asset with proportional transaction costs. We consider an agent with liquidity preference, modeled by a Cobb-Douglas utility function that includes the liquid wealth. We analyze the properties of the value function and divide the solvency region into three regions: the buying region, the no-trading region, and the selling region, and prove that all three regions are non-empty. We mathematically characterize and numerically solve the optimal policy and prove its optimality. Our numerical analysis sheds light on the impact of various parameters on the optimal policy, and some intuition and economic insights behind it are also analyzed. We find that liquidity preference encourages agents to retain more liquid wealth and inhibits consumption, and may even result in a negative allocation to the illiquid asset. The liquid risky asset not only affects the location of the three regions but also has an impact on consumption. However, whether this impact on consumption is promoted or inhibited depends on the degree of risk aversion of agents.
A Dynamic Model of Private Asset Allocation
Authors: Hui Chen, Giovanni Gambarotta, Simon Scheidegger, Yu Xu
Date: 2025-03-03 00:00:00
Tasks: model

We build a state-of-the-art dynamic model of private asset allocation that considers five key features of private asset markets: (1) the illiquid nature of private assets, (2) timing lags between capital commitments, capital calls, and eventual distributions, (3) time-varying business cycle conditions, (4) serial correlation in observed private asset returns, and (5) regulatory constraints on certain institutional investors' portfolio choices. We use cutting-edge machine learning methods to quantify the optimal investment policies over the life cycle of a fund. Moreover, our model offers regulators a tool for precisely quantifying the trade-offs when setting risk-based capital charges.
Modeling portfolio loss distribution under infectious defaults and immunization
Authors: Gianluca Farina, Rosella Giacometti, Gabriele Torri
Date: 2025-03-05 00:00:00

We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a failed defence from healthy ones. We then propose an efficient recursive algorithm for the loss distribution. Then we extend the framework with a more flexible mixture distribution to better fit real-world data. Finally, we propose an empirical application in which we price synthetic CDO tranches of the iTraxx index, finding a good fit for multiple tranches.
Forecasting realized volatility in the stock market: a path-dependent perspective
Authors: Xiangdong Liu, Sicheng Fu, Shaopeng Hong
Date: 2025-03-02 00:00:00

Volatility forecasting in financial markets is a topic that has received more attention from scholars. In this paper, we propose a new volatility forecasting model that combines the heterogeneous autoregressive (HAR) model with a family of path-dependent volatility models (HAR-PD). The model utilizes the long- and short-term memory properties of price data to capture volatility features and trend features. By integrating the features of path-dependent volatility into the HAR model family framework, we develop a new set of volatility forecasting models. And, we propose a HAR-REQ model based on the empirical quartile as a threshold, which exhibits stronger forecasting ability compared to the HAR-REX model. Subsequently, the predictive performance of the HAR-PD model family is evaluated by statistical tests using data from the Chinese stock market and compared with the basic HAR model family. The empirical results show that the HAR-PD model family has higher forecasting accuracy compared to the underlying HAR model family. In addition, robustness tests confirm the significant predictive power of the HAR-PD model family.
Advanced Deep Learning Techniques for Analyzing Earnings Call Transcripts: Methodologies and Applications
Authors: Umair Zakir, Evan Daykin, Amssatou Diagne, Jacob Faile
Date: 2025-02-27 00:00:00
Tasks: Computational Efficiency, Decision Making, Management, Model Optimization, Sentiment Analysis

This study presents a comparative analysis of deep learning methodologies such as BERT, FinBERT and ULMFiT for sentiment analysis of earnings call transcripts. The objective is to investigate how Natural Language Processing (NLP) can be leveraged to extract sentiment from large-scale financial transcripts, thereby aiding in more informed investment decisions and risk management strategies. We examine the strengths and limitations of each model in the context of financial sentiment analysis, focusing on data preprocessing requirements, computational efficiency, and model optimization. Through rigorous experimentation, we evaluate their performance using key metrics, including accuracy, precision, recall, and F1-score. Furthermore, we discuss potential enhancements to improve the effectiveness of these models in financial text analysis, providing insights into their applicability for real-world financial decision-making.
VWAP Execution with Signature-Enhanced Transformers: A Multi-Asset Learning Approach
Authors: Remi Genet
Date: 2025-03-04 00:00:00

In this paper I propose a novel approach to Volume Weighted Average Price (VWAP) execution that addresses two key practical challenges: the need for asset-specific model training and the capture of complex temporal dependencies. Building upon my recent work in dynamic VWAP execution arXiv:2502.18177, I demonstrate that a single neural network trained across multiple assets can achieve performance comparable to or better than traditional asset-specific models. The proposed architecture combines a transformer-based design inspired by arXiv:2406.02486 with path signatures for capturing geometric features of price-volume trajectories, as in arXiv:2406.17890. The empirical analysis, conducted on hourly cryptocurrency trading data from 80 trading pairs, shows that the globally-fitted model with signature features (GFT-Sig) achieves superior performance in both absolute and quadratic VWAP loss metrics compared to asset-specific approaches. Notably, these improvements persist for out-of-sample assets, demonstrating the model's ability to generalize across different market conditions. The results suggest that combining global parameter sharing with signature-based feature extraction provides a scalable and robust approach to VWAP execution, offering significant practical advantages over traditional asset-specific implementations.
To Hedge or Not to Hedge: Optimal Strategies for Stochastic Trade Flow Management
Authors: Philippe Bergault, Olivier Guéant, Hamza Bodor
Date: 2025-03-04 00:00:00
Tasks: Management

This paper addresses the trade-off between internalisation and externalisation in the management of stochastic trade flows. We consider agents who must absorb flows and manage risk by deciding whether to warehouse it or hedge in the market, thereby incurring transaction costs and market impact. Unlike market makers, these agents cannot skew their quotes to attract offsetting flows and deter risk-increasing ones, leading to a fundamentally different problem. Within the Almgren-Chriss framework, we derive almost-closed-form solutions in the case of quadratic execution costs, while more general cases require numerical methods. In particular, we discuss the challenges posed by artificial boundary conditions when using classical grid-based numerical PDE techniques and propose reinforcement learning methods as an alternative.
A New Traders' Game? -- Response Functions in a Historical Perspective
Authors: Cedric Schuhmann, Benjamin Köhler, Anton J. Heckens, Thomas Guhr
Date: 2025-03-03 00:00:00

Traders on financial markets generate non-Markovian effects in various ways, particularly through their competition with one another which can be interpreted as a game between different (types of) traders. To quantify the market mechanisms, we analyze self-response functions for pairs of different stocks and the corresponding trade sign correlators. While the non-Markovian dynamics in the self-responses is liquidity-driven, it is expectation-driven in the cross-responses which is related to the emergence of correlations. We study the non-stationarity of theses responses over time. In our previous analysis, we only investigated the crisis year 2008. We now considerably extend this by also analyzing the years 2007, 2014 and 2021. To improve statistics, we also work out averaged response functions for the different years. We find significant variations over time revealing changes in the traders' game.
Conformal prediction of future insurance claims in the regression problem
Authors: Liang Hong
Date: 2025-03-05 00:00:00
Tasks: Conformal Prediction, Prediction, regression, valid

In the current insurance literature, prediction of insurance claims in the regression problem is often performed with a statistical model. This model-based approach may potentially suffer from several drawbacks: (i) model misspecification, (ii) selection effect, and (iii) lack of finite-sample validity. This article addresses these three issues simultaneously by employing conformal prediction -- a general machine learning strategy for valid predictions. The proposed method is both model-free and tuning-parameter-free. It also guarantees finite-sample validity at a pre-assigned coverage probability level. Examples, based on both simulated and real data, are provided to demonstrate the excellent performance of the proposed method and its applications in insurance, especially regarding meeting the solvency capital requirement of European insurance regulation, Solvency II.
Evaluation of adaptive sampling methods in scenario generation for virtual safety impact assessment of pre-crash safety systems
Authors: Xiaomi Yang, Henrik Imberg, Carol Flannagan, Jonas Bärgman
Date: 2025-03-02 00:00:00
Tasks: Computational Efficiency, CPU

Virtual safety assessment plays a vital role in evaluating the safety impact of pre-crash safety systems such as advanced driver assistance systems (ADAS) and automated driving systems (ADS). However, as the number of parameters in simulation-based scenario generation increases, the number of crash scenarios to simulate grows exponentially, making complete enumeration computationally infeasible. Efficient sampling methods, such as importance sampling and active sampling, have been proposed to address this challenge. However, a comprehensive evaluation of how domain knowledge, stratification, and batch sampling affect their efficiency remains limited. This study evaluates the performance of importance sampling and active sampling in scenario generation, incorporating two domain-knowledge-driven features: adaptive sample space reduction (ASSR) and stratification. Additionally, we assess the effects of a third feature, batch sampling, on computational efficiency in terms of both CPU and wall-clock time. Based on our findings, we provide practical recommendations for applying ASSR, stratification, and batch sampling to optimize sampling performance. Our results demonstrate that ASSR substantially improves sampling efficiency for both importance sampling and active sampling. When integrated into active sampling, ASSR reduces the root mean squared estimation error (RMSE) of the estimates by up to 90\%. Stratification further improves sampling performance for both methods, regardless of ASSR implementation. When ASSR and/or stratification are applied, importance sampling performs on par with active sampling, whereas when neither feature is used, active sampling is more efficient. Larger batch sizes reduce wall-clock time but increase the number of simulations required to achieve the same estimation accuracy.
Feature Matching Intervention: Leveraging Observational Data for Causal Representation Learning
Authors: Haoze Li, Jun Xie
Date: 2025-03-05 00:00:00
Tasks: Causal Discovery, Graph Learning, Representation Learning

A major challenge in causal discovery from observational data is the absence of perfect interventions, making it difficult to distinguish causal features from spurious ones. We propose an innovative approach, Feature Matching Intervention (FMI), which uses a matching procedure to mimic perfect interventions. We define causal latent graphs, extending structural causal models to latent feature space, providing a framework that connects FMI with causal graph learning. Our feature matching procedure emulates perfect interventions within these causal latent graphs. Theoretical results demonstrate that FMI exhibits strong out-of-distribution (OOD) generalizability. Experiments further highlight FMI's superior performance in effectively identifying causal features solely from observational data.
Unsupervised Attributed Dynamic Network Embedding with Stability Guarantees
Authors: Emma Ceccherini, Ian Gallagher, Andrew Jones, Daniel Lawson
Date: 2025-03-04 00:00:00
Tasks: Link Prediction, Network Embedding, Node Classification, Position, Representation Learning

Stability for dynamic network embeddings ensures that nodes behaving the same at different times receive the same embedding, allowing comparison of nodes in the network across time. We present attributed unfolded adjacency spectral embedding (AUASE), a stable unsupervised representation learning framework for dynamic networks in which nodes are attributed with time-varying covariate information. To establish stability, we prove uniform convergence to an associated latent position model. We quantify the benefits of our dynamic embedding by comparing with state-of-the-art network representation learning methods on three real attributed networks. To the best of our knowledge, AUASE is the only attributed dynamic embedding that satisfies stability guarantees without the need for ground truth labels, which we demonstrate provides significant improvements for link prediction and node classification.
Inductive randomness predictors
Authors: Vladimir Vovk
Date: 2025-03-04 00:00:00

This paper introduces inductive randomness predictors, which form a superset of inductive conformal predictors. Its focus is on a very simple special case, binary inductive randomness predictors. It is interesting that binary inductive randomness predictors have an advantage over inductive conformal predictors, although they also have a serious disadvantage. This advantage will allow us to reach the surprising conclusion that non-trivial inductive conformal predictors are inadmissible in the sense of statistical decision theory.
Robust Multi-Source Domain Adaptation under Label Shift
Authors: Congbin Xu, Chengde Qian, Zhaojun Wang, Changliang Zou
Date: 2025-03-04 00:00:00
Tasks: Domain Adaptation, Outlier Detection

As the volume of data continues to expand, it becomes increasingly common for data to be aggregated from multiple sources. Leveraging multiple sources for model training typically achieves better predictive performance on test datasets. Unsupervised multi-source domain adaptation aims to predict labels of unlabeled samples in the target domain by using labeled samples from source domains. This work focuses on robust multi-source domain adaptation for multi-category classification problems against the heterogeneity of label shift and data contamination. We investigate a domain-weighted empirical risk minimization framework for robust estimation of the target domain's class proportion. Inspired by outlier detection techniques, we propose a refinement procedure within this framework. With the estimated class proportion, robust classifiers for the target domain can be constructed. Theoretically, we study the finite-sample error bounds of the domain-weighted empirical risk minimization and highlight the improvement of the refinement step. Numerical simulations and real-data applications demonstrate the superiority of the proposed method.
Correcting Mode Proportion Bias in Generalized Bayesian Inference via a Weighted Kernel Stein Discrepancy
Authors: Elham Afzali, Saman Muthukumarana, Liqun Wang
Date: 2025-03-03 00:00:00
Tasks: Bayesian Inference, Computational Efficiency

Generalized Bayesian Inference (GBI) provides a flexible framework for updating prior distributions using various loss functions instead of the traditional likelihoods, thereby enhancing the model robustness to model misspecification. However, GBI often suffers the problem associated with intractable likelihoods. Kernelized Stein Discrepancy (KSD), as utilized in a recent study, addresses this challenge by relying only on the gradient of the log-likelihood. Despite this innovation, KSD-Bayes suffers from critical pathologies, including insensitivity to well-separated modes in multimodal posteriors. To address this limitation, we propose a weighted KSD method that retains computational efficiency while effectively capturing multimodal structures. Our method improves the GBI framework for handling intractable multimodal posteriors while maintaining key theoretical properties such as posterior consistency and asymptotic normality. Experimental results demonstrate that our method substantially improves mode sensitivity compared to standard KSD-Bayes, while retaining robust performance in unimodal settings and in the presence of outliers.