arXiv subjects

Nikolaus Schweizer

Publications and source records attributed to Nikolaus Schweizer.

13 recordsLinked to original sources

arXiv2024

Stochastic Monotonicity and Random Utility Models: The Good and The Ugly

When it comes to structural estimation of risk preferences from data on choices, random utility models have long been one of the standard research tools in economics. A recent literature has challenged these models, pointing out some concerning monotonicity and, thus, identification problems. In this paper, we take a second look and point out that some of the criticism - while extremely valid - may have gone too far, demanding monotonicity of choice probabilities in decisions where it is not so clear whether it should be imposed. We introduce a new class of random utility models based on carefully constructed generalized risk premia which always satisfy our relaxed monotonicity criteria. Moreover, we show that some of the models used in applied research like the certainty-equivalent-based random utility model for CARA utility actually lie in this class of monotonic stochastic choice models. We conclude that not all random utility models are bad.

econ.GN↗

arXiv2021

Robust Decisions for Heterogeneous Agents via Certainty Equivalents

We study the problem of a planner who resolves risk-return trade-offs - like financial investment decisions - on behalf of a collective of agents with heterogeneous risk preferences. The planner's objective is a two-stage utility functional where an outer utility function is applied to the distribution of the agents' certainty equivalents from a given decision. Assuming lognormal risks and heterogeneous power utility preferences for the agents, we characterize optimal behavior in a setting where the planner can let each agent choose between different options from a fixed menu of possible decisions, leading to a grouping of the agents by risk preferences. These optimal decision menus are derived first for the case where the planner knows the distribution of preferences exactly and then for a case where he faces uncertainty about this distribution, only having access to upper and lower bounds on agents' relative risk aversion. Finally, we provide tight bounds on the welfare loss from offering a finite menu of choices rather than fully personalized decisions.

q-fin.GN↗

arXiv2020

Contingent Capital with Stock Price Triggers in Interbank Networks

This paper studies existence and uniqueness of equilibrium prices in a model of the banking sector in which banks trade contingent convertible bonds with stock price triggers among each other. This type of financial product was proposed as an instrument for stabilizing the global banking system after the financial crisis. Yet it was recognized early on that these products may create circularity problems in the definition of stock prices - even in the absence of trade. We find that if conversion thresholds are such that bond holders are indifferent about marginal conversions, there exists a unique equilibrium irrespective of the network structure. When thresholds are lower, existence of equilibrium breaks down while higher thresholds may lead to multiplicity of equilibria. Moreover, there are complex network effects. One bank's conversion may trigger further conversions - or prevent them, depending on the constellations of asset values and conversion triggers.

econ.GN↗

arXiv2020

`Regression Anytime' with Brute-Force SVD Truncation

We propose a new least-squares Monte Carlo algorithm for the approximation of conditional expectations in the presence of stochastic derivative weights. The algorithm can serve as a building block for solving dynamic programming equations, which arise, e.g., in non-linear option pricing problems or in probabilistic discretization schemes for fully non-linear parabolic partial differential equations. Our algorithm can be generically applied when the underlying dynamics stem from an Euler approximation to a stochastic differential equation. A built-in variance reduction ensures that the convergence in the number of samples to the true regression function takes place at an arbitrarily fast polynomial rate, if the problem under consideration is smooth enough.

math.ST↗

arXiv2019

Perturbation Bounds for Monte Carlo within Metropolis via Restricted Approximations

The Monte Carlo within Metropolis (MCwM) algorithm, interpreted as a perturbed Metropolis-Hastings (MH) algorithm, provides an approach for approximate sampling when the target distribution is intractable. Assuming the unperturbed Markov chain is geometrically ergodic, we show explicit estimates of the difference between the n-th step distributions of the perturbed MCwM and the unperturbed MH chains. These bounds are based on novel perturbation results for Markov chains which are of interest beyond the MCwM setting. To apply the bounds, we need to control the difference between the transition probabilities of the two chains and to verify stability of the perturbed chain.

stat.CO↗

arXiv2017

Perturbation theory for Markov chains via Wasserstein distance

Perturbation theory for Markov chains addresses the question how small differences in the transitions of Markov chains are reflected in differences between their distributions. We prove powerful and flexible bounds on the distance of the $n$th step distributions of two Markov chains when one of them satisfies a Wasserstein ergodicity condition. Our work is motivated by the recent interest in approximate Markov chain Monte Carlo (MCMC) methods in the analysis of big data sets. By using an approach based on Lyapunov functions, we provide estimates for geometrically ergodic Markov chains under weak assumptions. In an autoregressive model, our bounds cannot be improved in general. We illustrate our theory by showing quantitative estimates for approximate versions of two prominent MCMC algorithms, the Metropolis-Hastings and stochastic Langevin algorithms.

stat.CO↗

arXiv2016

Pathwise Iteration for Backward SDEs

We introduce a novel numerical approach for a class of stochastic dynamic programs which arise as discretizations of backward stochastic differential equations or semi-linear partial differential equations. Solving such dynamic programs numerically requires the approximation of nested conditional expectations, i.e., iterated integrals of previous approximations. Our approach allows us to compute and iteratively improve upper and lower bounds on the true solution starting from an arbitrary and possibly crude input approximation. We demonstrate the benefits of our approach in a high dimensional financial application.

math.NA↗

arXiv2015

What's in a ball? Constructing and characterizing uncertainty sets

In the presence of model risk, it is well-established to replace classical expected values by worst-case expectations over all models within a fixed radius from a given reference model. This is the "robustness" approach. We show that previous methods for measuring this radius, e.g. relative entropy or polynomial divergences, are inadequate for reference models which are moderately heavy-tailed such as lognormal models. Worst cases are either infinitely pessimistic, or they rule out the possibility of fat-tailed "power law" models as plausible alternatives. We introduce a new family of divergence measures which captures intermediate levels of pessimism.

q-fin.RM↗

arXiv2015

Error bounds of MCMC for functions with unbounded stationary variance

We prove explicit error bounds for Markov chain Monte Carlo (MCMC) methods to compute expectations of functions with unbounded stationary variance. We assume that there is a $p\in(1,2)$ so that the functions have finite $L_p$-norm. For uniformly ergodic Markov chains we obtain error bounds with the optimal order of convergence $n^{1/p-1}$ and if there exists a spectral gap we almost get the optimal order. Further, a burn-in period is taken into account and a recipe for choosing the burn-in is provided.

math.ST↗

arXiv2014

A primal-dual algorithm for BSDEs

We generalize the primal-dual methodology, which is popular in the pricing of early-exercise options, to a backward dynamic programming equation associated with time discretization schemes of (reflected) backward stochastic differential equations (BSDEs). Taking as an input some approximate solution of the backward dynamic program, which was pre-computed, e.g., by least-squares Monte Carlo, our methodology allows to construct a confidence interval for the unknown true solution of the time discretized (reflected) BSDE at time 0. We numerically demonstrate the practical applicability of our method in two five-dimensional nonlinear pricing problems where tight price bounds were previously unavailable.

q-fin.CP↗

arXiv2014

Faster Comparison of Stopping Times by Nested Conditional Monte Carlo

We show that deliberately introducing a nested simulation stage can lead to significant variance reductions when comparing two stopping times by Monte Carlo. We derive the optimal number of nested simulations and prove that the algorithm is remarkably robust to misspecifications of this number. The method is applied to several problems related to Bermudan/American options. In these applications, our method allows to substantially increase the efficiency of other variance reduction techniques, namely, Quasi-Control Variates and Multilevel Monte Carlo.

q-fin.CP↗

arXiv2012

Non-asymptotic Error Bounds for Sequential MCMC Methods in Multimodal Settings

We prove non-asymptotic error bounds for Sequential MCMC methods in the case of multimodal target distributions. Our bounds depend in an explicit way on upper bounds on relative densities, on constants associated with local mixing properties of the MCMC dynamics, namely, local spectral gaps and local hyperboundedness, and on the amount of probability mass shifted between effectively disconnected components of the state space.

math.PR↗

arXiv2012

Non-asymptotic Error Bounds for Sequential MCMC and Stability of Feynman-Kac Propagators

We provide a generic way of deducing non-asymptotic error bounds for Sequential MCMC methods from suitable stability properties of Feynman-Kac propagators. We show how to derive this type of stability from mixing conditions for the MCMC dynamics, namely, spectral gaps and hyperboundedness, and from upper bounds on the relative densities in the sequence of distributions.

math.PR↗