Searcharxiv⌕ Search

arXiv subjects

Xiaolin Luo

Publications and source records attributed to Xiaolin Luo.

At least 37 records · Page 2Linked to original sources

The redshift dependence of Alcock-Paczynski effect: cosmological constraints from the current and next generation observations

The tomographic Alcock-Paczynski (AP) test is a robust large-scale structure (LSS) measurement that receives little contamination from the redshift space distortion (RSD). It has placed tight cosmological constraints by using small and intermediate clustering scales of the LSS data. However, previous works have neglected the cross-correlation among different redshift bins, which could cause the statistical uncertainty being underestimated by $\sim$20\%. In this work, we further improve this method by including this multi-redshifts full correlation. We apply it to the SDSS DR12 galaxies sample and find out that, for $Λ$CDM, the combination of AP with the Planck+BAO dataset slightly reduces (within 1-$σ$) $Ω_m$ to $0.304\pm0.007$ (68.3\% CL). This then leads to a larger $H_0$ and also mildly affects $Ω_b h^2$, $n_s$ and the derived parameters $z_*$, $r_*$, $z_{re}$ but not $τ$, $A_s$ and $σ_8$. For the flat $w$CDM model, our measurement gives $Ω_m=0.301\pm 0.010$ and $w=-1.090\pm 0.047$, where the additional AP measurement reduces the error budget by $\sim 25\%$. When including more parameters into the analysis, the AP method also improves the constraints on $Ω_k$, $\sum m_μ$, $N_{\rm eff}$ by $20-30\%$. Early universe parameters such as $dn_s/d{\rm ln}k$ and $r$, however, are unaffected. Assuming the dark energy equation of state $w=w_0+w_a \frac{z}{1+z}$, the Planck+BAO+SNIa+$H_0$+AP datasets prefer a dynamical dark energy at $\approx1.5 σ$ CL. Finally, we forecast the cosmological constraints expected from the DESI galaxy survey and find that combining AP with CMB+BAO method would improve the $w_0$-$w_a$ constraint by a factor of $\sim 10$.

astro-ph.CO↗

Probing Cosmic Acceleration by Using Model-Independent Parametrizations and Three Kinds of Supernova Statistics Techniques

In this work, we explore the evolution of the dark energy equation of state ω by using Chevalliear-PolarskiLinder (CPL) parametrization and the binned parametrizations. For binned parametrizations, we adopt three methods to choose the redshift interval: I. Ensure that "Δz = const", where Δz is the width of each bin; II.Ensure that "nΔz = const", where n is the number of SNIa in each bin; III. Treat redshift discontinuity points as models parameters, i.e. "free Δz". For observational data, we adopt JLA type Ia supernova (SNIa) samples, SDSS DR12 data, and Planck 2015 distance priors. In particular, for JLA SNIa samples, we consider three statistic techniques: I. Magnitude statistics, which is the traditional method; II. Flux statistics, which reduces the systematic uncertainties of SNIa; III. Improve flux statistics, which can reduce the systematic uncertainties and give tighter constrains at the same time. The results are as follows: (1) For all the cases, ω = -1 is always satisfied at 1σ confidence regions; It means that ΛCDM is still favored by current observations. (2) For magnitude statistics, "free Δz" model will give the smallest error bars; this conclusion does not hold true for flux statistics and improved flux statistic. (3) The improved flux statistic yields a largest present fractional density of matter Ωm; in addition, this technique will give a largest current deceleration parameter q0 , which reveals a universe with a slowest cosmic acceleration.

astro-ph.CO↗

Comparing dark energy models with current observational data

We make a comparison for thirteen dark energy (DE) models by using current cosmological observations, including type Ia supernova, baryon acoustic oscillations, and cosmic microwave background. To perform a systematic and comprehensive analysis, we consider three statistics methods of SNIa, including magnitude statistic (MS), flux statistic (FS), and improved flux statistic (IFS), as well as two kinds of BAO data. In addition, Akaike information criteria (AIC) and Bayesian information criteria (BIC) are used to assess the worth of each model. We find that: (1) The thirteen models can be divided into four grades by performing cosmology-fits. The cosmological constant model, which is most favored by current observations, belongs to grade one; $α$DE, constant $w$ and generalized Chaplygin gas models belong to grade two; Chevalliear-Polarski-Linder (CPL) parametrization, Wang parametrization, doubly coupled massive gravity, new generalized Chaplygin gas and holographic DE models belong to grade three; agegraphic DE, Dvali-Gabadadze-Porrati, Vacuum metamorphosis and Ricci DE models, which are excluded by current observations, belong to grade four. (2) For parameter estimation, adopting IFS yields the biggest $Ω_m$ and the smallest $h$ for all the models. In contrast, using different BAO data does not cause significant effects. (3) IFS has the strongest constraint ability on various DE models. For examples, adopting IFS yields the smallest value of $Δ$AIC for all the models; in addition, making use of this technique yields the biggest figure of merit for CPL and Wang parametrizations.

astro-ph.CO↗

Valuation of capital protection options

This paper presents numerical algorithm and results for pricing a capital protection option offered by many asset managers for investment portfolios to take advantage of market growth and protect savings. Under optimal withdrawal policyholder behaviour the pricing of such a product is an optimal stochastic control problem that cannot be solved using Monte Carlo method. In low dimension case, it can be solved using PDE based methods such as finite difference. In this paper, we develop a much more efficient Gauss-Hermite quadrature method with a one-dimensional cubic spline for calculation of the expectation between withdrawal/reset dates, and a bi-cubic spline interpolation for applying the jump conditions across withdrawal/reset dates. We show results for both static and dynamic withdrawals and for both the asset accumulation and the pension phases (different penalties for any excessive withdrawal) in the retirement investment cycle. To evaluate products with capital protection option, it is common industry practice to assume static withdrawals and use Monte Carlo method. As a result, the fair fee is underpriced if policyholder behaves optimally. We found that extra fee that has to be charged to counter the optimal policyholder behaviour is most significant at smaller interest rate and higher volatility levels, and it is sensitive to the penalty threshold. At low interest rate and a moderate penalty threshold level (15% of the portfolio value per annum) typically set in practice, the extra fee due to optimal withdrawal can be as high as 40% and more on top of the base case of no withdrawal or the case of fixed withdrawals at the penalty threshold.

q-fin.PR↗

Valuation of Variable Annuities with Guaranteed Minimum Withdrawal Benefit under Stochastic Interest Rate

A variable annuity contract with Guaranteed Minimum Withdrawal Benefit (GMWB) promises to return the entire initial investment through cash withdrawals during the contract plus the remaining account balance at maturity, regardless of the portfolio performance. Under the optimal(dynamic) withdrawal strategy of a policyholder, GMWB pricing becomes an optimal stochastic control problem that can be solved by backward recursion of Bellman equation. In this paper we develop a very efficient new algorithm for pricing these contracts in the case of stochastic interest rate not considered previously in the literature. Presently our method is applied to the Vasicek interest rate model, but it is generally applicable to any model when transition density or moments of the underlying asset and interest rate are known in closed form or can be evaluated efficiently. Using bond price as a numeraire the required expectations in the backward recursion are reduced to two-dimensional integrals calculated through a high order Gauss-Hermite quadrature applied on a two-dimensional cubic spline interpolation. Numerical results from the new algorithm for a series of GMWB contracts for both static and optimal cases are presented. As a validation, results of the algorithm are compared with the closed form solutions for simple vanilla options, and with Monte Carlo and finite difference results for the static GMWB. The comparison demonstrates that the new algorithm is significantly faster than finite difference or Monte Carlo for all the two-dimensional problems tested so far. For dynamic GMWB pricing, we found that for positive correlation between the underlying asset and interest rate, the GMWB price under the stochastic interest rate is significantly higher compared to the case of deterministic interest rate, while for negative correlation the difference is less but still significant.

q-fin.PR↗

A unified pricing of variable annuity guarantees under the optimal stochastic control framework

In this paper, we review pricing of variable annuity living and death guarantees offered to retail investors in many countries. Investors purchase these products to take advantage of market growth and protect savings. We present pricing of these products via an optimal stochastic control framework, and review the existing numerical methods. For numerical valuation of these contracts, we develop a direct integration method based on Gauss-Hermite quadrature with a one-dimensional cubic spline for calculation of the expected contract value, and a bi-cubic spline interpolation for applying the jump conditions across the contract cashflow event times. This method is very efficient when compared to the partial differential equation methods if the transition density (or its moments) of the risky asset underlying the contract is known in closed form between the event times. We also present accurate numerical results for pricing of a Guaranteed Minimum Accumulation Benefit (GMAB) guarantee available on the market that can serve as a benchmark for practitioners and researchers developing pricing of variable annuity guarantees.

q-fin.PR↗

Variable Annuity with GMWB: surrender or not, that is the question

Under the optimal withdrawal strategy of a policyholder, the pricing of variable annuities with Guaranteed Minimum Withdrawal Benefit (GMWB) is an optimal stochastic control problem. The surrender feature available in marketed products allows termination of the contract before maturity, making it also an optimal stopping problem. Although the surrender feature is quite common in variable annuity contracts, there appears to be no published analysis and results for this feature in GMWB under optimal policyholder behaviour - results found in the literature so far are consistent with the absence of such a feature. Also, it is of practical interest to see how the much simpler bang-bang strategy, although not optimal for GMWB, compares with optimal GMWB strategy with surrender option. In this paper we extend our recently developed algorithm (Luo and Shevchenko 2015a) to include surrender option in GMWB and compare prices under different policyholder strategies: optimal, static and bang-bang. Results indicate that following a simple but sub-optimal bang-bang strategy does not lead to significant reduction in the price or equivalently in the fee, in comparison with the optimal strategy. We observed that the extra value added by the surrender option could add very significant value to the GMWB contract. We also performed calculations for static withdrawal with surrender option, which is the same as bang-bang minus the "no-withdrawal" choice. We find that the fee for such contract is only less than 1% smaller when compared to the case of bang-bang strategy, meaning that th "no-withdrawal" option adds little value to the contract.

q-fin.PR↗

Valuation of Variable Annuities with Guaranteed Minimum Withdrawal and Death Benefits via Stochastic Control Optimization

In this paper we present a numerical valuation of variable annuities with combined Guaranteed Minimum Withdrawal Benefit (GMWB) and Guaranteed Minimum Death Benefit (GMDB) under optimal policyholder behaviour solved as an optimal stochastic control problem. This product simultaneously deals with financial risk, mortality risk and human behaviour. We assume that market is complete in financial risk and mortality risk is completely diversified by selling enough policies and thus the annuity price can be expressed as appropriate expectation. The computing engine employed to solve the optimal stochastic control problem is based on a robust and efficient Gauss-Hermite quadrature method with cubic spline. We present results for three different types of death benefit and show that, under the optimal policyholder behaviour, adding the premium for the death benefit on top of the GMWB can be problematic for contracts with long maturities if the continuous fee structure is kept, which is ordinarily assumed for a GMWB contract. In fact for some long maturities it can be shown that the fee cannot be charged as any proportion of the account value -- there is no solution to match the initial premium with the fair annuity price. On the other hand, the extra fee due to adding the death benefit can be charged upfront or in periodic instalment of fixed amount, and it is cheaper than buying a separate life insurance.

q-fin.CP↗

Fast and Simple Method for Pricing Exotic Options using Gauss-Hermite Quadrature on a Cubic Spline Interpolation

There is a vast literature on numerical valuation of exotic options using Monte Carlo, binomial and trinomial trees, and finite difference methods. When transition density of the underlying asset or its moments are known in closed form, it can be convenient and more efficient to utilize direct integration methods to calculate the required option price expectations in a backward time-stepping algorithm. This paper presents a simple, robust and efficient algorithm that can be applied for pricing many exotic options by computing the expectations using Gauss-Hermite integration quadrature applied on a cubic spline interpolation. The algorithm is fully explicit but does not suffer the inherent instability of the explicit finite difference counterpart. A `free' bonus of the algorithm is that it already contains the function for fast and accurate interpolation of multiple solutions required by many discretely monitored path dependent options. For illustrations, we present examples of pricing a series of American options with either Bermudan or continuous exercise features, and a series of exotic path-dependent options of target accumulation redemption note (TARN). Results of the new method are compared with Monte Carlo and finite difference methods, including some of the most advanced or best known finite difference algorithms in the literature. The comparison shows that, despite its simplicity, the new method can rival with some of the best finite difference algorithms in accuracy and at the same time it is significantly faster. Virtually the same algorithm can be applied to price other path-dependent financial contracts such as Asian options and variable annuities.

q-fin.CP↗

Markov chain Monte Carlo estimation of default and recovery: dependent via the latent systematic factor

It is a well known fact that recovery rates tend to go down when the number of defaults goes up in economic downturns. We demonstrate how the loss given default model with the default and recovery dependent via the latent systematic risk factor can be estimated using Bayesian inference methodology and Markov chain Monte Carlo method. This approach is very convenient for joint estimation of all model parameters and latent systematic factors. Moreover, all relevant uncertainties are easily quantified. Typically available data are annual averages of defaults and recoveries and thus the datasets are small and parameter uncertainty is significant. In this case Bayesian approach is superior to the maximum likelihood method that relies on a large sample limit Gaussian approximation for the parameter uncertainty. As an example, we consider a homogeneous portfolio with one latent factor. However, the approach can be easily extended to deal with non-homogenous portfolios and several latent factors.

q-fin.RM↗

Fast Numerical Method for Pricing of Variable Annuities with Guaranteed Minimum Withdrawal Benefit under Optimal Withdrawal Strategy

A variable annuity contract with Guaranteed Minimum Withdrawal Benefit (GMWB) promises to return the entire initial investment through cash withdrawals during the policy life plus the remaining account balance at maturity, regardless of the portfolio performance. Under the optimal withdrawal strategy of a policyholder, the pricing of variable annuities with GMWB becomes an optimal stochastic control problem. So far in the literature these contracts have only been evaluated by solving partial differential equations (PDE) using the finite difference method. The well-known Least-Squares or similar Monte Carlo methods cannot be applied to pricing these contracts because the paths of the underlying wealth process are affected by optimal cash withdrawals (control variables) and thus cannot be simulated forward in time. In this paper we present a very efficient new algorithm for pricing these contracts in the case when transition density of the underlying asset between withdrawal dates or its moments are known. This algorithm relies on computing the expected contract value through a high order Gauss-Hermite quadrature applied on a cubic spline interpolation. Numerical results from the new algorithm for a series of GMWB contract are then presented, in comparison with results using the finite difference method solving corresponding PDE. The comparison demonstrates that the new algorithm produces results in very close agreement with those of the finite difference method, but at the same time it is significantly faster; virtually instant results on a standard desktop PC.

q-fin.PR↗

Pricing TARN Using a Finite Difference Method

Typically options with a path dependent payoff, such as Target Accumulation Redemption Note (TARN), are evaluated by a Monte Carlo method. This paper describes a finite difference scheme for pricing a TARN option. Key steps in the proposed scheme involve tracking of multiple one-dimensional finite difference solutions, application of jump conditions at each cash flow exchange date, and a cubic spline interpolation of results after each jump. Since a finite difference scheme for TARN has significantly different features from a typical finite difference scheme for options with a path independent payoff, we give a step by step description on the implementation of the scheme, which is not available in the literature. The advantages of the proposed finite difference scheme over the Monte Carlo method are illustrated by examples with three different knockout types. In the case of constant or time dependent volatility models (where Monte Carlo requires simulation at cash flow dates only), the finite difference method can be faster by an order of magnitude than the Monte Carlo method to achieve the same accuracy in price. Finite difference method can be even more efficient in comparison with Monte Carlo in the case of local volatility model where Monte Carlo requires significantly larger number of time steps. In terms of robust and accurate estimation of Greeks, the advantage of the finite difference method will be even more pronounced.

q-fin.CP↗

Dependent default and recovery: MCMC study of downturn LGD credit risk model

There is empirical evidence that recovery rates tend to go down just when the number of defaults goes up in economic downturns. This has to be taken into account in estimation of the capital against credit risk required by Basel II to cover losses during the adverse economic downturns; the so-called "downturn LGD" requirement. This paper presents estimation of the LGD credit risk model with default and recovery dependent via the latent systematic risk factor using Bayesian inference approach and Markov chain Monte Carlo method. This approach allows joint estimation of all model parameters and latent systematic factor, and all relevant uncertainties. Results using Moody's annual default and recovery rates for corporate bonds for the period 1982-2010 show that the impact of parameter uncertainty on economic capital can be very significant and should be assessed by practitioners.

q-fin.RM↗

Bayesian Model Choice of Grouped t-copula

One of the most popular copulas for modeling dependence structures is t-copula. Recently the grouped t-copula was generalized to allow each group to have one member only, so that a priori grouping is not required and the dependence modeling is more flexible. This paper describes a Markov chain Monte Carlo (MCMC) method under the Bayesian inference framework for estimating and choosing t-copula models. Using historical data of foreign exchange (FX) rates as a case study, we found that Bayesian model choice criteria overwhelmingly favor the generalized t-copula. In addition, all the criteria also agree on the second most likely model and these inferences are all consistent with classical likelihood ratio tests. Finally, we demonstrate the impact of model choice on the conditional Value-at-Risk for portfolios of six major FX rates.

q-fin.CP↗

A Short Tale of Long Tail Integration

Integration of the form $\int_a^\infty {f(x)w(x)dx} $, where $w(x)$ is either $\sin (ω{\kern 1pt} x)$ or $\cos (ω{\kern 1pt} x)$, is widely encountered in many engineering and scientific applications, such as those involving Fourier or Laplace transforms. Often such integrals are approximated by a numerical integration over a finite domain $(a,\,b)$, leaving a truncation error equal to the tail integration $\int_b^\infty {f(x)w(x)dx} $ in addition to the discretization error. This paper describes a very simple, perhaps the simplest, end-point correction to approximate the tail integration, which significantly reduces the truncation error and thus increases the overall accuracy of the numerical integration, with virtually no extra computational effort. Higher order correction terms and error estimates for the end-point correction formula are also derived. The effectiveness of this one-point correction formula is demonstrated through several examples.

math.NA↗

Constraining the shape of a gravity anomalous body using reversible jump Markov chain Monte Carlo

Typical geophysical inversion problems are ill-posed, non-linear and non-unique. Sometimes the problem is trans-dimensional, where the number of unknown parameters is one of the unknowns, which makes the inverse problem even more challenging. Detecting the shape of a geophysical object underneath the earth surface from gravity anomaly is one of such complex problems, where the number of geometrical parameters is one of the unknowns. To deal with the difficulties of non-uniqueness, ill-conditioning and nonlinearity, a statistical Bayesian model inference approach is adopted. A reversible jump Markov chain Monte Carlo (RJMCMC) algorithm is proposed to overcome the difficulty of trans-dimensionality. Carefully designed within-model and between-model Markov chain moves are implemented to reduce the rate of generating inadmissible geometries, thus achieving good overall efficiency in the Monte Carlo sampler. Numerical experiments on a 2-D problem show that the proposed algorithm is capable of obtaining satisfactory solutions with quantifiable uncertainty to a challenging trans-dimensional geophysical inverse problem. Solutions from RJMCMC appear to be parsimonious for the given prior, in the sense that among the models satisfactorily represent the true model, models with higher posterior probabilities tend to have fewer number of parameters. The proposed numerical algorithm can be readily adapted to other similar trans-dimensional geophysical inverse applications. Keywords: trans-dimensional geophysical inversion, reversible jump Markov chain Monte Carlo; gravity anomaly.

physics.geo-ph↗

The t copula with Multiple Parameters of Degrees of Freedom: Bivariate Characteristics and Application to Risk Management

The t copula is often used in risk management as it allows for modelling tail dependence between risks and it is simple to simulate and calibrate. However, the use of a standard t copula is often criticized due to its restriction of having a single parameter for the degrees of freedom (dof) that may limit its capability to model the tail dependence structure in a multivariate case. To overcome this problem, grouped t copula was proposed recently, where risks are grouped a priori in such a way that each group has a standard t copula with its specific dof parameter. In this paper we propose the use of a grouped t copula, where each group consists of one risk factor only, so that a priori grouping is not required. The copula characteristics in the bivariate case are studied. We explain simulation and calibration procedures, including a simulation study on finite sample properties of the maximum likelihood estimators and Kendall's tau approximation. This new copula can be significantly different from the standard t copula in terms of risk measures such as tail dependence, value at risk and expected shortfall. Keywords: grouped t copula, tail dependence, risk management.

math.PR↗

Computing Tails of Compound Distributions Using Direct Numerical Integration

An efficient adaptive direct numerical integration (DNI) algorithm is developed for computing high quantiles and conditional Value at Risk (CVaR) of compound distributions using characteristic functions. A key innovation of the numerical scheme is an effective tail integration approximation that reduces the truncation errors significantly with little extra effort. High precision results of the 0.999 quantile and CVaR were obtained for compound losses with heavy tails and a very wide range of loss frequencies using the DNI, Fast Fourier Transform (FFT) and Monte Carlo (MC) methods. These results, particularly relevant to operational risk modelling, can serve as benchmarks for comparing different numerical methods. We found that the adaptive DNI can achieve high accuracy with relatively coarse grids. It is much faster than MC and competitive with FFT in computing high quantiles and CVaR of compound distributions in the case of moderate to high frequencies and heavy tails.

q-fin.CP↗