This thesis explains the theoretical background of stochastic differential equations in one dimension. We also show how to solve such differential equations using strong It o-Taylor expansion schemes over large time grids. We also attempt to solve a problem regarding a specific approximation of a stochastic integral for which there is no explicit solution. This approximation, which utilizes the distribution of this particular stochastic integral, gives the wrong order of convergence when performing a grid convergence study. We use numerical integration of the stochastic integral as an alternative approximation, which is correct with regards to convergence.

Quantile is a basic and an important quantity of a random variable. In some distributions, their quantiles have closed-form expressions. However, for many continuous distributions, the closed-form expressions of their quantiles do not exist. Yu and Zelterman (2011) and Chang (2004) have proposed an approximation of quantiles. In this paper, we propose an improved method which is combined the Taylor expansion with Newton¡¦s method. Some examples are given to compare the computing time of the method we proposed with the methods in Yu and Zelterman (2011) and Chang (2004).

Thesis (MSc (Mathematics))--University of Stellenbosch, 2010. / ENGLISH ABSTRACT: In this thesis, higher order numerical methods for weak approximation of solutions of stochastic differential equations (SDEs) are presented. They are motivated by option pricing problems in finance where the price of a given option can be written as the expectation of a functional of a diffusion process. Numerical methods of order at most one have been the most used so far and higher order methods have been difficult to perform because of the unknown density of iterated integrals of the d-dimensional Brownian motion present in the stochastic Taylor expansion. In 2001, Kusuoka constructed a higher order approximation scheme based on Malliavin calculus. The iterated stochastic integrals are replaced by a family of finitely-valued random variables whose moments up to a certain fixed order are equivalent to moments of iterated Stratonovich integrals of Brownian motion. This method has been shown to outperform the traditional Euler-Maruyama method. In 2004, this method was refined by Lyons and Victoir into Cubature on Wiener space. Lyons and Victoir extended the classical cubature method for approximating integrals in finite dimension to approximating integrals in infinite dimensional Wiener space. Since then, many authors have intensively applied these ideas and the topic is today an active domain of research. Our work is essentially based on the recently developed higher order schemes based on ideas of the Kusuoka approximation and Lyons-Victoir “Cubature on Wiener space” and mostly applied to option pricing. These are the Ninomiya-Victoir (N-V) and Ninomiya- Ninomiya (N-N) approximation schemes. It should be stressed here that many other applications of these schemes have been developed among which is the Alfonsi scheme for the CIR process and the decomposition method presented by Kohatsu and Tanaka for jump driven SDEs. After sketching the main ideas of numerical approximation methods in Chapter 1 , we start Chapter 2 by setting up some essential terminologies and definitions. A discussion on the stochastic Taylor expansion based on iterated Stratonovich integrals is presented, we close this chapter by illustrating this expansion with the Euler-Maruyama approximation scheme. Chapter 3 contains the main ideas of Kusuoka approximation scheme, we concentrate on the implementation of the algorithm. This scheme is applied to the pricing of an Asian call option and numerical results are presented. We start Chapter 4 by taking a look at the classical cubature formulas after which we propose in a simple way the general ideas of “Cubature on Wiener space” also known as the Lyons-Victoir approximation scheme. This is an extension of the classical cubature method. The aim of this scheme is to construct cubature formulas for approximating integrals defined on Wiener space and consequently, to develop higher order numerical schemes. It is based on the stochastic Stratonovich expansion and can be viewed as an extension of the Kusuoka scheme. Applying the ideas of the Kusuoka and Lyons-Victoir approximation schemes, Ninomiya- Victoir and Ninomiya-Ninomiya developed new numerical schemes of order 2, where they transformed the problem of solving SDE into a problem of solving ordinary differential equations (ODEs). In Chapter 5 , we begin by a general presentation of the N-V algorithm. We then apply this algorithm to the pricing of an Asian call option and we also consider the optimal portfolio strategies problem introduced by Fukaya. The implementation and numerical simulation of the algorithm for these problems are performed. We find that the N-V algorithm performs significantly faster than the traditional Euler-Maruyama method. Finally, the N-N approximation method is introduced. The idea behind this scheme is to construct an ODE-valued random variable whose average approximates the solution of a given SDE. The Runge-Kutta method for ODEs is then applied to the ODE drawn from the random variable and a linear operator is constructed. We derive the general expression for the constructed operator and apply the algorithm to the pricing of an Asian call option under the Heston volatility model. / AFRIKAANSE OPSOMMING: In hierdie proefskrif, word ’n hoërorde numeriese metode vir die swak benadering van oplossings tot stogastiese differensiaalvergelykings (SDV) aangebied. Die motivering vir hierdie werk word gegee deur ’n probleem in finansies, naamlik om opsiepryse vas te stel, waar die prys van ’n gegewe opsie beskryf kan word as die verwagte waarde van ’n funksionaal van ’n diffusie proses. Numeriese metodes van orde, op die meeste een, is tot dus ver in algemene gebruik. Dit is moelik om hoërorde metodes toe te pas as gevolg van die onbekende digtheid van herhaalde integrale van d-dimensionele Brown-beweging teenwoordig in die stogastiese Taylor ontwikkeling. In 2001 het Kusuoka ’n hoërorde benaderings skema gekonstrueer wat gebaseer is op Malliavin calculus. Die herhaalde stogastiese integrale word vervang deur ’n familie van stogastiese veranderlikes met eindige waardes, wat se momente tot ’n sekere vaste orde bestaan. Dit is al gedemonstreer dat hierdie metode die tradisionele Euler-Maruyama metode oortref. In 2004 is hierdie metode verfyn deur Lyons en Victoir na volumeberekening op Wiener ruimtes. Lyons en Victoir het uitgebrei op die klassieke volumeberekening metode om integrale te benader in eindige dimensie na die benadering van integrale in oneindige dimensionele Wiener ruimte. Sedertdien het menige outeurs dié idees intensief toegepas en is die onderwerp vandag ’n aktiewe navorsings gebied. Ons werk is hoofsaaklik gebaseer op die onlangse ontwikkelling van hoërorde skemas, wat op hul beurt gebaseer is op die idees van Kusuoka benadering en Lyons-Victoir "Volumeberekening op Wiener ruimte". Die werk word veral toegepas op die prysvastelling van opsies, naamlik Ninomiya-Victoir en Ninomiya-Ninomiya benaderings skemas. Dit moet hier beklemtoon word dat baie ander toepassings van hierdie skemas al ontwikkel is, onder meer die Alfonsi skema vir die CIR proses en die ontbinding metode wat voorgestel is deur Kohatsu en Tanaka vir sprong aangedrewe SDVs. Na ’n skets van die hoof idees agter metodes van numeriese benadering in Hoofstuk 1 , begin Hoofstuk 2 met die neersetting van noodsaaklike terminologie en definisies. ’n Diskussie oor die stogastiese Taylor ontwikkeling, gebaseer op herhaalde Stratonovich integrale word uiteengeset, waarna die hoofstuk afsluit met ’n illustrasie van dié ontwikkeling met die Euler-Maruyama benaderings skema. Hoofstuk 3 bevat die hoofgedagtes agter die Kusuoka benaderings skema, waar daar ook op die implementering van die algoritme gekonsentreer word. Hierdie skema is van toepassing op die prysvastelling van ’n Asiatiese call-opsie, numeriese resultate word ook aangebied. Ons begin Hoofstuk 4 deur te kyk na klassieke volumeberekenings formules waarna ons op ’n eenvoudige wyse die algemene idees van "Volumeberekening op Wiener ruimtes", ook bekend as die Lyons-Victoir benaderings skema, as ’n uitbreiding van die klassieke volumeberekening metode gebruik. Die doel van hierdie skema is om volumeberekening formules op te stel vir benaderings integrale wat gedefinieer is op Wiener ruimtes en gevolglik, hoërorde numeriese skemas te ontwikkel. Dit is gebaseer op die stogastiese Stratonovich ontwikkeling en kan beskou word as ’n ontwikkeling van die Kusuoka skema. Deur Kusuoka en Lyon-Victoir se idees oor benaderings skemas toe te pas, het Ninomiya-Victoir en Ninomiya- Ninomiya nuwe numeriese skemas van orde 2 ontwikkel, waar hulle die probleem omgeskakel het van een waar SDVs opgelos moet word, na een waar gewone differensiaalvergelykings (GDV) opgelos moet word. Hierdie twee skemas word in Hoofstuk 5 uiteengeset. Alhoewel die benaderings soortgelyk is, is daar ’n beduidende verskil in die algoritmes self. Hierdie hoofstuk begin met ’n algemene uiteensetting van die Ninomiya-Victoir algoritme waar ’n arbitrêre vaste tyd horison, T, gebruik word. Dié word toegepas op opsieprysvastelling en optimale portefeulje strategie probleme. Verder word numeriese simulasies uitgevoer, die prestasie van die Ninomiya-Victoir algoritme was bestudeer en vergelyk met die Euler-Maruyama metode. Ons maak die opmerking dat die Ninomiya-Victoir algoritme aansienlik vinniger is. Die belangrikste resultaat van die Ninomiya-Ninomiya benaderings skema word ook voorgestel. Deur die idee van ’n Lie algebra te gebruik, het Ninomiya en Ninomiya ’n stogastiese veranderlike met GDV-waardes gekonstrueer wat se gemiddeld die oplossing van ’n gegewe SDV benader. Die Runge-Kutta metode vir GDVs word dan toegepas op die GDV wat getrek is uit die stogastiese veranderlike en ’n lineêre operator gekonstrueer. ’n Veralgemeende uitdrukking vir die gekonstrueerde operator is afgelei en die algoritme is toegepas op die prysvasstelling van ’n Asiatiese opsie onder die Heston onbestendigheids model.

All financial institutions that provide options to counterparties will in most cases get involved withMonte Carlo simulations. Options with a payoff function that depends on asset’s value at differenttime points over its lifespan are so called path dependent options. This path dependency impli-cates that there exists no parametric solution and the price must hence be estimated, it is hereMonte Carlo methods come into the picture. The problem though with this fundamental optionpricing method is the computational time. Prices fluctuate continuously on the open market withrespect to different risk factors and since it’s impossible to re-evaluate the option for all shifts dueto its computing intensive nature, estimations of the option price must be used. Estimating theprice from known points will of course never produce the same result as a full re-evaluation but anestimation method that produces reliable results and greatly reduces computing time is desirable.This thesis will evaluate different approaches and try to minimize the estimation error with respectto a certain number of risk factors.This is the background for our master thesis at Swedbank. The goal is to create multiple estima-tion methods and compare them to Swedbank’s current estimation model. By doing this we couldpotentially provide Swedbank with improvement ideas regarding some of its option products andrisk measurements. This thesis is primarily based on two estimation methods that estimate optionprices with respect to two variable risk factors, the value of the underlying assets and volatility.The first method is a grid that uses a second order Taylor expansion and the sensitivities delta,gamma and vega. The other method uses a grid of pre-simulated option prices for different shiftsin risk factors. The interpolation technique that is used in this method is calledPiecewise CubicHermiteinterpolation. The methods (or referred to as approaches in the report) are implementedto handle a relative change of 50 percent in the underlying asset’s index value, which is the firstrisk factor. Concerning the second risk factor, volatility, both methods estimate prices for a 50percent relative downward change and an upward change of 400 percent from the initial volatility.Should there emerge even more extreme market conditions both methods use linear extrapolationto estimate a new option price.

This thesis established the cubature method developed by Gyurkó & Lyons (2010) and Lyons & Victor (2004) for the Heath–Jarrow–Morton (HJM) model. The HJM model was first proposed by Heath, Jarrow, and Morton (1992) to model the evolution of interest rates through the dynamics of the forward rate curve. These dynamics are described by an infinite-dimensional stochastic equation with the whole forward rate curve as a state variable. To construct the cubature method, we first discretize the infinite dimensional HJM equation and thereafter apply stochastic Taylor expansion to obtain cubature formulae. We further used their results to construct cubature formulae to degree 3, 5, 7 and 9 in 1-dimensional space. We give, a considerable step by step calculation regarding construction of cubature formulae on Wiener space.

Consider the D-optimal designs for a combined polynomial of degree d and trigonometric of order m regression on a partial circle [see Graybill (1976), p. 324]. It is shown that the structure of the optimal design depends only on the length of the design interval and that the support points are analytic functions of this parameter. Moreover, the Taylor expansion of the optimal support points can be determined efficiently by a recursive procedure.

In this thesis, we provide convergent numerical solutions to non-linear forward-BSDEs (Backward Stochastic Differential Equations). Applications in mathematical finance, financial economics and financial econometrics are discussed. Numerical examples show the effectiveness of our methods.

This thesis is on an advanced method for pricing financial derivatives in a market model,which comprises two stochastic volatilities. Financial derivatives are instruments whosethat is related to any financial asset. Underlying assets in derivatives are mostly financialinstruments; such as security, currency or a commodity. Stochastic volatilities are used infinancial mathematics to assess financial derivative securities; such as contingent claims andoptions for valuation of the derivatives, at the expiration of the contract. This study examinedtheoretical frameworks that evolve around the pricing of financial deriv- atives in a marketmodel and it mainly examines two stochastic volatilities: cubature formula and splittingmethod by analysing how these volatilities affect the pricing of financial derivatives. The studydeveloped an approximation approach with a double stochastic volatilities model in termsof Stratonovich integrals to evaluate the contingent claim, examined the similarities betweenNinomiya–Ninomiya scheme and Ninomiya–Victoir scheme, and rewrite the system of doublestochastic volatility model in terms of the standard Brownian motion.

[EN] Classically, the study of the contact with hyperplanes and hyperspheres has been realized by using the family of height and distance squared functions. On the first part of the thesis, we analyze the Taylor expansion of the exponential map up to order three of a submanifold $M$ immersed in $\r n.$ Our main goal is to show its usefulness for the description of special contacts of the submanifolds with geometrical models. As we analyze the contacts of high order, the complexity of the calculations increases. In this work, through the Taylor expansion of the exponential map, we characterize the geometry of order higher than $3$ in terms of invariants of the immersion, so that the effective computations in specific cases become more affordable. It allows also to get new geometric insights. On the second part of the thesis, we introduce the concept of critical point of a smooth map between submanifolds. If we consider a differentiable $k$-dimensional manifold $M$ immersed in $\r{k+n},$ we know that its focal set can also be interpreted as the image of the critical points of the {\it normal map} $\nu(m,u): NM\to \r{k+n}$ defined by $\nu(m,u)=\pi_N(m,u)+ u,$ for $m\in M$ and $u\in N_mM,$ where $\pi_N:NM\to M$ denotes the normal bundle. In the same way, the parabolic set of a differential submanifold is given through the analysis of the singularities of the height functions over the submanifold. If we consider a differentiable $k$-dimensional manifold $M$ immersed in $\r{k+n},$ we know that its parabolic set can also be interpreted as the image of the critical points of the {\it generalized Gauss map} $\psi(m,u): NM\to \r{k+n}$ defined by $\psi(m,u)= u,$ for $u\in N_mM.$ Finally, we characterize the asymptotic directions as the tangent set of a $k$-dimensional manifold $M$ immersed in $\r{k+n}$ throughout the study of the singularities of the tangent map $\Omega(m,y): TM\to \r{k+n}$ defined by $\Omega(m,y)=\pi(m,y)+y,$ for $y\in T_mM,$ where $\pi:TM\to M$ denotes the tangent bundle. We describe first the focal set and its geometrical relation to the Veronese of curvature for $k$-dimensional immersions in $\r{k+n}.$ Then we define the $r$-critical points of a differential map $f:H \to K$ between two differential manifolds and characterize the $2$ and $3$-critical points of the normal map and generalized Gauss map. The number of these critical points at $m\in M$ may depend on the degeneration of the curvature ellipse and we calculate those numbers in the particular case that $M$ is an immersed surface in $\r{4}$ for the normal map and $\r{5}$ for the generalized Gauss map. / [ES] En general, el estudio del contacto con hiperplanos e hiperesferas se ha llevado a cabo usando la familia de funciones altura y la función distancia al cuadrado. En la primera parte de la tesis analizamos el desarrollo de Taylor de la aplicación exponencial hasta orden 3 de una subvariedad $M$ inmersa en $\r n.$ Nuestro principal objetivo es mostrar su utilidad en el estudio de contactos especiales de subvariedades con modelos geométricos. A medida que analizamos los contactos de orden mayor, la complejidad de las cuentas aumenta. En este trabajo, a través del desarrollo de Taylor de la aplicación exponencial, caracterizamos la geometría de orden mayor que $3$ en términos de invariantes geométricos de la inmersión, por lo que el trabajo con las cuentas en casos especiales se convierte en más manejable. Esto nos permite también obtener nuevos resultados geométricos. En la segunda parte de la tesis se introduce el concepto de punto crítico de una aplicación regular entre subvariedades. Si consideramos una variedad diferenciable $M$ de dimensión $k$ e inmersa en $\r{k+n},$ sabemos que su conjunto focal puede ser interpretado como la imagen de los puntos críticos de la {\it aplicación normal} $\nu(m,u): NM\to \r{k+n}$ definida por $\nu(m,u)=\pi_N(m,u)+ u,$ para $m\in M$ y $u\in N_mM,$ donde $\pi_N:NM\to M$ denota el fibrado normal. De la misma manera, el conjunto parabólico de una subvariedad diferencial viene dado por el análisis de las singularidades de la función altura sobre la subvariedad. Si consideramos una subvariedad $M$ de dimensión $k$ e inmersa en $\r{k+n},$ sabemos que su conjunto parabólico puede ser interpretado como la imagen de los puntos críticos de la {\it aplicación generalizada de Gauss} $\psi(m,u): NM\to \r{k+n}$ definida por $\psi(m,u)= u,$ donde $u\in N_mM.$ Finalmente, caracterizamos las direcciones asintóticas como el conjunto de direcciones del tangente de una subvariedad $M$ de dimensión $k$ e inmersa en $\r{k+n}$ a través del estudio de las singularidades de la aplicación tangente $\Omega(m,y): TM\to \r{k+n}$ definida por $\Omega(m,y)=\pi(m,y)+y,$ para $y\in T_mM,$ donde $\pi:TM\to M$ denota el fibrado tangente. Describimos primero el conjunto focal y su relación geométrica con la Veronese de curvatura para una variedad $k$ dimensional inmersa en $\r{k+n}.$ Entonces, definimos los puntos $r$-críticos de una aplicación $f:H \to K$ entre dos subvariedades y caracterizamos los puntos $2$ y $3$ críticos de la aplicación normal y la aplicación generalizada de Gauss. El número de estos puntos críticos en $m\in M$ depende de la degeneración de la elipse de curvatura y calculamos ese número en el caso particular de una superficie inmersa en $\r{4}$ para la aplicación normal y $\r{5}$ para la aplicación generalizada de Gauss. / [CA] En general, l'estudi del contacte amb hiperplans i hiperesferes s'ha dut a terme utilitzant la família de funcions altura i la funció distància al quadrat. A la primera part de la tesi analitzem el desenvolupament de Taylor de l'aplicació exponencial fins a ordre 3 d'una subvarietat $M$ immersa en $\r n.$ El nostre principal objectiu és mostrar la seua utilitat en l'estudi de contactes especials de subvarietats amb models geomètrics. A mesura que analitzem els contactes d'ordre major, la complexitat dels comptes augmenta. En aquest treball, a través del desenvolupament de Taylor de l'aplicació exponencial, caracteritzem la geometria d'ordre major que $ 3 $ en termes d'invariants geomètrics de la immersió, de manera que el treball amb els comptes en casos especials es converteix en més manejable. Això ens permet també obtenir nous resultats geomètrics. A la segona part de la tesi s'introdueix el concepte de punt crític d'una aplicació regular entre subvarietats. Si considerem una varietat diferenciable $ M $ de dimensió $ k $ i immersa en $ \r {k + n}, $ sabem que el seu conjunt focal pot ser interpretat com la imatge dels punts crítics de la {\it aplicació normal} $ \nu (m, u): NM \to \r {k + n} $ definida per $ \nu (m, u) = \pi_N (m, u) + o, $ per $ m \in M $ i $ u \in N_mM, $ on $ \pi_N: NM \to M $ denota el fibrat normal. De la mateixa manera, el conjunt parabòlic d'una subvarietat diferencial ve donat per l'anàlisi de les singularitats de la funció altura sobre la subvarietat. Si considerem una subvarietat $ M $ de dimensió $ k $ i immersa en $ \r {k + n}, $ sabem que el seu conjunt parabòlic pot ser interpretat com la imatge dels punts crítics de la {\it aplicació generalitzada de Gauss} $ \psi (m, u): NM \to \r{k + n} $ definida per $ \psi (m, u) = u, $ on $ u \in N_mM. $ Finalment, caracteritzem les direccions asimptòtiques com el conjunt de direccions del tangent d'una subvarietat $ M $ de dimensió $ k $ i immersa en $ \r{k + n} $ a través de l'estudi de les singularitats de l'aplicació tangent $ \Omega (m, y): TM \to \r {k + n} $ definida per $ \Omega (m, y) = \pi (m, y) + y, $ per $ y \in T_mM, $ on $ \pi: TM \to M $ denota el fibrat tangent. Descrivim primer el conjunt focal i la seva relació geomètrica amb la Veronese de curvatura per a una varietat $ k $ dimensional immersa en $ \r{k + n}. $ Llavors, definim els punts $ r $-crítics d'una aplicació $ f: H \to K $ entre dues subvarietats i caracteritzem els punts $ 2 $ i $ 3 $ crítics de l'aplicació normal i l'aplicació generalitzada de Gauss. El nombre d'aquests punts crítics en $ m \in M $ depèn de la degeneració de l'el·lipse de curvatura i calculem aquest nombre en el cas particular d'una superfície immersa en $ \r{4} $ per a l'aplicació normal i $ \r{5} $ per a l'aplicació generalitzada de Gauss. / García Monera, M. (2015). r-critical points and Taylor expansion of the exponential map, for smooth immersions in Rk+n [Tesis doctoral]. Universitat Politècnica de València. https://doi.org/10.4995/Thesis/10251/50935

This paper is concerned with the problem of constructing A-optimal design for polynomial regression with analytic weight function on the interval [m-a,m+a]. It is shown that the structure of the optimal design depends on a and weight function only, as a close to 0. Moreover, if the weight function is an analytic function a, then a scaled version of optimal support points and weights is analytic functions of a at $a=0$. We make use of a Taylor expansion which coefficients can be determined recursively, for calculating the A-optimal designs.