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Nonlinear Valuation and Non-Gaussian Risks in Finance

Author

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  • Madan,Dilip B.
  • Schoutens,Wim

Abstract

What happens to risk as the economic horizon goes to zero and risk is seen as an exposure to a change in state that may occur instantaneously at any time? All activities that have been undertaken statically at a fixed finite horizon can now be reconsidered dynamically at a zero time horizon, with arrival rates at the core of the modeling. This book, aimed at practitioners and researchers in financial risk, delivers the theoretical framework and various applications of the newly established dynamic conic finance theory. The result is a nonlinear non-Gaussian valuation framework for risk management in finance. Risk-free assets disappear and low risk portfolios must pay for their risk reduction with negative expected returns. Hedges may be constructed to enhance value by exploiting risk interactions. Dynamic trading mechanisms are synthesized by machine learning algorithms. Optimal exposures are designed for option positioning simultaneously across all strikes and maturities.

Suggested Citation

  • Madan,Dilip B. & Schoutens,Wim, 2022. "Nonlinear Valuation and Non-Gaussian Risks in Finance," Cambridge Books, Cambridge University Press, number 9781316518090.
    • Handle: RePEc:cup:cbooks:9781316518090
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    Cited by:

    1. Yoshihiro Shirai, 2022. "Extreme Measures in Continuous Time Conic Finace," Papers 2210.13671, arXiv.org, revised Oct 2023.
    2. Dilip B. Madan & King Wang, 2022. "Two sided efficient frontiers at multiple time horizons," Annals of Finance, Springer, vol. 18(3), pages 327-353, September.

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