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Scenario Constraints with Memory: A Finite-State Approach to Quantitative Financial Analysis

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  • Vitaly Nurnberg

Abstract

Quantifying worst-case and best-case performance under complex market scenarios is a persistent challenge in financial risk management and the verification of path-dependent financial instruments, such as exotic options and structured products. Simulation-based methods are well suited for probabilistic estimation, but they do not directly provide exhaustive guarantees over all admissible scenarios or explicit witnesses for extremal outcomes. To address this, we introduce a quantitative automata-based framework for the exact extremal analysis of financial systems under declarative scenario constraints. At the core of our approach are event history automata (EHAs), a new formal model that integrates regular-expression event patterns with admissible numerical intervals to represent constrained event histories with memory. Quantitative payoffs are represented by weighted finance finite automata (WFFAs), which allow transition weights to depend on observed market values. By computing the synchronized product of EHAs and WFFAs, our framework enables the exact calculation of upper and lower payoff bounds. Furthermore, the method automatically extracts interpretable witness event histories that realize these extremal outcomes. We demonstrate the practical viability of the approach through a case study of an autocallable structured product with path-dependent mechanisms. The case study analyzes how different scenario constraints affect coupon accumulation, early redemption, and protection-loss outcomes. Scalability experiments indicate that the framework's execution remains computationally feasible for practical contract horizons and nontrivial constraint configurations. Overall, this approach provides a mathematically rigorous complement to standard financial simulation methods.

Suggested Citation

  • Vitaly Nurnberg, 2026. "Scenario Constraints with Memory: A Finite-State Approach to Quantitative Financial Analysis," Papers 2606.11223, arXiv.org.
  • Handle: RePEc:arx:papers:2606.11223
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    File URL: https://arxiv.org/pdf/2606.11223
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