A Nonparametric Approach to Pricing and Hedging Derivative Securities via Learning Networks

We propose a nonparametric method for estimating derivative financial asset pricing formulae using learning networks. To demonstrate feasibility, we first simulate Black-Scholes option prices and show that learning networks can recover the Black-Scholes formula from a two-year training set of daily options prices, and that the resulting network formula can be used successfully to both price and delta-hedge options out-of-sample. For comparison, we estimate models using four popular methods: ordinary least squares, radial basis functions, multilayer perceptrons, and projection pursuit. To illustrate practical relevance, we also apply our approach to S&P 500 futures options data from 1987 to 1991.

Hypothesizing Device Mechanisms: Opening Up the Black Box

I describe an approach to forming hypotheses about hidden mechanism configurations within devices given external observations and a vocabulary of primitive mechanisms. An implemented causal modelling system called JACK constructs explanations for why a second piece of toast comes out lighter, why the slide in a tire gauge does not slip back inside when the gauge is removed from the tire, and how in a refrigerator a single substance can serve as a heat sink for the interior and a heat source for the exterior. I report the number of hypotheses admitted for each device example, and provide empirical results which isolate the pruning power due to different constraint sources.

The Image Irradiance Equation: Its Solution and Application

How much information about the shape of an object can be inferred from its image? In particular, can the shape of an object be reconstructed by measuring the light it reflects from points on its surface? These questions were raised by Horn [HO70] who formulated a set of conditions such that the image formation can be described in terms of a first order partial differential equation, the image irradiance equation. In general, an image irradiance equation has infinitely many solutions. Thus constraints necessary to find a unique solution need to be identified. First we study the continuous image irradiance equation. It is demonstrated when and how the knowledge of the position of edges on a surface can be used to reconstruct the surface. Furthermore we show how much about the shape of a surface can be deduced from so called singular points. At these points the surface orientation is uniquely determined by the measured brightness. Then we investigate images in which certain types of silhouettes, which we call b-silhouettes, can be detected. In particular we answer the following question in the affirmative: Is there a set of constraints which assure that if an image irradiance equation has a solution, it is unique? To this end we postulate three constraints upon the image irradiance equation and prove that they are sufficient to uniquely reconstruct the surface from its image. Furthermore it is shown that any two of these constraints are insufficient to assure a unique solution to an image irradiance equation. Examples are given which illustrate the different issues. Finally, an overview of known numerical methods for computing solutions to an image irradiance equation are presented.