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- Title
CONIC TRADING IN A MARKOVIAN STEADY STATE.
- Authors
MADAN, DILIP B.; PISTORIUS, MARTIJN; SCHOUTENS, WIM
- Abstract
Trading strategies are valued using nonlinear conditional expectations based on concave probability distortions. They are also referred to as expectation with respect to a nonadditive probability. The nonadditive probability attains conservatism by exaggerating upwards the probabilities of tail loss events and simultaneously deflating the probabilities of tail gain events. Fixed points for value and policy iterations are obtained when probabilities are distorted and they fail to exist for classical linear or additive expectations. Illustrations are provided for Markovian systems in one, two and five dimensions. Trading positions are seen to balance prediction rewards against the demands for hedging value functions.
- Subjects
MARKOV spectrum; STEADY state conduction; PROBABILITY theory; FIXED point theory; LOGICAL prediction
- Publication
International Journal of Theoretical & Applied Finance, 2017, Vol 20, Issue 2, p-1
- ISSN
0219-0249
- Publication type
Article
- DOI
10.1142/S0219024917500108