Evaluating the Predictability of the Volatility Smile Using Return Distributions

In this paper, we examine the predictability of observed volatility smiles in three major European index options markets, utilising the historical return distributions of the respective underlying assets. The analysis involves an application of the Black (1976) pricing model adjusted in accordance with the Jarrow-Rudd methodology as proposed in 1982. Thereby we adjust the expected future returns for the third and fourth central moments as these represent deviations from normality in the distributions of observed returns. Thus, they are considered one possible explanation to the existence of the smile. The obtained results indicate that the inclusion of the higher moments in the pricing model to some extent reduces the volatility smile, compared with the unadjusted Black-76 model. However, as the smile is partly a function of supply, demand, and liquidity, and as such intricate to model, this modification does not appear sufficient to fully capture the characteristics of the smile.

Cluster based core vector machine

Core Vector Machine(CVM) is suitable for efficient large-scale pattern classification. In this paper, a method for improving the performance of CVM with Gaussian kernel function irrespective of the orderings of patterns belonging to different classes within the data set is proposed. This method employs a selective sampling based training of CVM using a novel kernel based scalable hierarchical clustering algorithm. Empirical studies made on synthetic and real world data sets show that the proposed strategy performs well on large data sets.

Solution concepts in continuous-kernel multicriteria games

This paper considers nonzero-sum multicriteria games with continuous kernels. Solution concepts based on the notions of Pareto optimality, equilibrium, and security are extended to these games. Separate necessary and sufficient conditions and existence results are presented for equilibrium, Pareto-optimal response, and Pareto-optimal security strategies of the players.

The Reproducing Kernel DMS-FEM: 3D Shape Functions and Applications to Linear Solid Mechanics

We propose a family of 3D versions of a smooth finite element method (Sunilkumar and Roy 2010), wherein the globally smooth shape functions are derivable through the condition of polynomial reproduction with the tetrahedral B-splines (DMS-splines) or tensor-product forms of triangular B-splines and ID NURBS bases acting as the kernel functions. While the domain decomposition is accomplished through tetrahedral or triangular prism elements, an additional requirement here is an appropriate generation of knotclouds around the element vertices or corners. The possibility of sensitive dependence of numerical solutions to the placements of knotclouds is largely arrested by enforcing the condition of polynomial reproduction whilst deriving the shape functions. Nevertheless, given the higher complexity in forming the knotclouds for tetrahedral elements especially when higher demand is placed on the order of continuity of the shape functions across inter-element boundaries, we presently emphasize an exploration of the triangular prism based formulation in the context of several benchmark problems of interest in linear solid mechanics. In the absence of a more rigorous study on the convergence analyses, the numerical exercise, reported herein, helps establish the method as one of remarkable accuracy and robust performance against numerical ill-conditioning (such as locking of different kinds) vis-a-vis the conventional FEM.

Optimised form of acceleration correction algorithm within SPH-based simulations of impact mechanics

In the context of SPH-based simulations of impact dynamics, an optimised and automated form of the acceleration correction algorithm (Shaw and Reid, 2009a) is developed so as to remove spurious high frequency oscillations in computed responses whilst retaining the stabilizing characteristics of the artificial viscosity in the presence of shocks and layers with sharp gradients. A rational framework for an insightful characterisation of the erstwhile acceleration correction method is first set up. This is followed by the proposal of an optimised version of the method, wherein the strength of the correction term in the momentum balance and energy equations is optimised. For the first time, this leads to an automated procedure to arrive at the artificial viscosity term. In particular, this is achieved by taking a spatially varying response-dependent support size for the kernel function through which the correction term is computed. The optimum value of the support size is deduced by minimising the (spatially localised) total variation of the high oscillation in the acceleration term with respect to its (local) mean. The derivation of the method, its advantages over the heuristic method and issues related to its numerical implementation are discussed in detail. (C) 2011 Elsevier Ltd. All rights reserved.

Pricing credit derivatives

The financial crisis set off by the default of Lehman Brothers in 2008 leading to disastrous consequences for the global economy has focused attention on regulation and pricing issues related to credit derivatives. Credit risk refers to the potential losses that can arise due to the changes in the credit quality of financial instruments. These changes could be due to changes in the ratings, market price (spread) or default on contractual obligations. Credit derivatives are financial instruments designed to mitigate the adverse impact that may arise due to credit risks. However, they also allow the investors to take up purely speculative positions. In this article we provide a succinct introduction to the notions of credit risk, the credit derivatives market and describe some of the important credit derivative products. There are two approaches to pricing credit derivatives, namely the structural and the reduced form or intensity-based models. A crucial aspect of the modelling that we touch upon briefly in this article is the problem of calibration of these models. We hope to convey through this article the challenges that are inherent in credit risk modelling, the elegant mathematics and concepts that underlie some of the models and the importance of understanding the limitations of the models.

Assessment of seismic hazard and liquefaction potential of Gujarat based on probabilistic approaches

Gujarat is one of the fastest-growing states of India with high industrial activities coming up in major cities of the state. It is indispensable to analyse seismic hazard as the region is considered to be most seismically active in stable continental region of India. The Bhuj earthquake of 2001 has caused extensive damage in terms of causality and economic loss. In the present study, the seismic hazard of Gujarat evaluated using a probabilistic approach with the use of logic tree framework that minimizes the uncertainties in hazard assessment. The peak horizontal acceleration (PHA) and spectral acceleration (Sa) values were evaluated for 10 and 2 % probability of exceedance in 50 years. Two important geotechnical effects of earthquakes, site amplification and liquefaction, are also evaluated, considering site characterization based on site classes. The liquefaction return period for the entire state of Gujarat is evaluated using a performance-based approach. The maps of PHA and PGA values prepared in this study are very useful for seismic hazard mitigation of the region in future.

Efficient Methods for Robust Classification Under Uncertainty in Kernel Matrices

In this paper we study the problem of designing SVM classifiers when the kernel matrix, K, is affected by uncertainty. Specifically K is modeled as a positive affine combination of given positive semi definite kernels, with the coefficients ranging in a norm-bounded uncertainty set. We treat the problem using the Robust Optimization methodology. This reduces the uncertain SVM problem into a deterministic conic quadratic problem which can be solved in principle by a polynomial time Interior Point (IP) algorithm. However, for large-scale classification problems, IP methods become intractable and one has to resort to first-order gradient type methods. The strategy we use here is to reformulate the robust counterpart of the uncertain SVM problem as a saddle point problem and employ a special gradient scheme which works directly on the convex-concave saddle function. The algorithm is a simplified version of a general scheme due to Juditski and Nemirovski (2011). It achieves an O(1/T-2) reduction of the initial error after T iterations. A comprehensive empirical study on both synthetic data and real-world protein structure data sets show that the proposed formulations achieve the desired robustness, and the saddle point based algorithm outperforms the IP method significantly.

Delineation of seismic source zones based on seismicity parameters and probabilistic evaluation of seismic hazard using logic tree approach

The delineation of seismic source zones plays an important role in the evaluation of seismic hazard. In most of the studies the seismic source delineation is done based on geological features. In the present study, an attempt has been made to delineate seismic source zones in the study area (south India) based on the seismicity parameters. Seismicity parameters and the maximum probable earthquake for these source zones were evaluated and were used in the hazard evaluation. The probabilistic evaluation of seismic hazard for south India was carried out using a logic tree approach. Two different types of seismic sources, linear and areal, were considered in the present study to model the seismic sources in the region more precisely. In order to properly account for the attenuation characteristics of the region, three different attenuation relations were used with different weightage factors. Seismic hazard evaluation was done for the probability of exceedance (PE) of 10% and 2% in 50 years. The spatial variation of rock level peak horizontal acceleration (PHA) and spectral acceleration (Sa) values corresponding to return periods of 475 and 2500 years for the entire study area are presented in this work. The peak ground acceleration (PGA) values at ground surface level were estimated based on different NEHRP site classes by considering local site effects.

A performance-based framework for assessing liquefaction potential based on CPT data

This article describes a new performance-based approach for evaluating the return period of seismic soil liquefaction based on standard penetration test (SPT) and cone penetration test (CPT) data. The conventional liquefaction evaluation methods consider a single acceleration level and magnitude and these approaches fail to take into account the uncertainty in earthquake loading. The seismic hazard analysis based on the probabilistic method clearly shows that a particular acceleration value is being contributed by different magnitudes with varying probability. In the new method presented in this article, the entire range of ground shaking and the entire range of earthquake magnitude are considered and the liquefaction return period is evaluated based on the SPT and CPT data. This article explains the performance-based methodology for the liquefaction analysis – starting from probabilistic seismic hazard analysis (PSHA) for the evaluation of seismic hazard and the performance-based method to evaluate the liquefaction return period. A case study has been done for Bangalore, India, based on SPT data and converted CPT values. The comparison of results obtained from both the methods have been presented. In an area of 220 km2 in Bangalore city, the site class was assessed based on large number of borehole data and 58 Multi-channel analysis of surface wave survey. Using the site class and peak acceleration at rock depth from PSHA, the peak ground acceleration at the ground surface was estimated using probabilistic approach. The liquefaction analysis was done based on 450 borehole data obtained in the study area. The results of CPT match well with the results obtained from similar analysis with SPT data.

Give-and-take based peer-to-peer content distribution networks

Content Distribution Networks (CDNs) are widely used to distribute data to large number of users. Traditionally, content is being replicated among a number of surrogate servers, leading to high operational costs. In this context, Peer-to-Peer (P2P) CDNs have emerged as a viable alternative. An issue of concern in P2P networks is that of free riders, i.e., selfish peers who download files and leave without uploading anything in return. Free riding must be discouraged. In this paper, we propose a criterion, the Give-and-Take (G&T) criterion, that disallows free riders. Incorporating the G&T criterion in our model, we study a problem that arises naturally when a new peer enters the system: viz., the problem of downloading a `universe' of segments, scattered among other peers, at low cost. We analyse this hard problem, and characterize the optimal download cost under the G&T criterion. We propose an optimal algorithm, and provide a sub-optimal algorithm that is nearly optimal, but runs much more quickly; this provides an attractive balance between running time and performance. Finally, we compare the performance of our algorithms with that of a few existing P2P downloading strategies in use. We also study the computation time for prescribing the strategy for initial segment and peer selection for the newly arrived peer for various existing and proposed algorithms, and quantify cost-computation time trade-offs.

Active learning in keyword search-based data integration

The problem of scaling up data integration, such that new sources can be quickly utilized as they are discovered, remains elusive: Global schemas for integrated data are difficult to develop and expand, and schema and record matching techniques are limited by the fact that data and metadata are often under-specified and must be disambiguated by data experts. One promising approach is to avoid using a global schema, and instead to develop keyword search-based data integration-where the system lazily discovers associations enabling it to join together matches to keywords, and return ranked results. The user is expected to understand the data domain and provide feedback about answers' quality. The system generalizes such feedback to learn how to correctly integrate data. A major open challenge is that under this model, the user only sees and offers feedback on a few ``top-'' results: This result set must be carefully selected to include answers of high relevance and answers that are highly informative when feedback is given on them. Existing systems merely focus on predicting relevance, by composing the scores of various schema and record matching algorithms. In this paper, we show how to predict the uncertainty associated with a query result's score, as well as how informative feedback is on a given result. We build upon these foundations to develop an active learning approach to keyword search-based data integration, and we validate the effectiveness of our solution over real data from several very different domains.

Hybrid Working Set Algorithm for SVM Learning With a Kernel Coprocessor on FPGA

Support vector machines (SVM) are a popular class of supervised models in machine learning. The associated compute intensive learning algorithm limits their use in real-time applications. This paper presents a fully scalable architecture of a coprocessor, which can compute multiple rows of the kernel matrix in parallel. Further, we propose an extended variant of the popular decomposition technique, sequential minimal optimization, which we call hybrid working set (HWS) algorithm, to effectively utilize the benefits of cached kernel columns and the parallel computational power of the coprocessor. The coprocessor is implemented on Xilinx Virtex 7 field-programmable gate array-based VC707 board and achieves a speedup of upto 25x for kernel computation over single threaded computation on Intel Core i5. An application speedup of upto 15x over software implementation of LIBSVM and speedup of upto 23x over SVMLight is achieved using the HWS algorithm in unison with the coprocessor. The reduction in the number of iterations and sensitivity of the optimization time to variation in cache size using the HWS algorithm are also shown.

The Impact of Regulation on Pricing Behavior in the Spanish Electricity Market

In this paper we measure the impact of regulatory measures which affected the Spanish electricity wholesale market in the period 2002-2005. Our approach is based on the fact that regulation changes firms' incentives and therefore their market behavior. In the absence of any regulation firms would choose profit- maximizing prices on their residual demands so that the observed gap between optimal and actual prices provides a measure of the effect of regulation. Our results indicate that regulation has decreased wholesale prices considerably, but became less effective at the end of the sample period which explains the change of regulatory regime introduced in 2006.

The Relationship between Risk and Expected Return in Europe

Revised: 2006-07