We develop a dynamic stochastic model of markets with an externality and multiple trading frictions, and cap-and-trade as the leading application. Slow participation, limited intermediation, and heterogeneous information interact in equilibrium: agents choose costly market access, access determines residual compliance demand, intermediary constraints translate residual demand into a surrender-month premium, and the premium feeds back into access incentives. These interactions shape how effectively the market corrects the externality. We characterize access choices in closed form, prove that the equilibrium premium is unique, and show that endogenous access dampens the response to each friction in isolation, while the interaction of multiple frictions is non-additive and can amplify the price response. We quantify the model using 2.7 million EU ETS registry transactions and compliance records from 2005-2021. About 40% of operators do not trade annually, purchases concentrate in April when returns are systematically high, and operator flow predicts future returns.

Does scientific publishing reward the quality of ideas or the advantage of connections? The question is universal to prestige-driven science, yet it has resisted decades of study because a paper's quality could not be gauged ahead of its publication fate without using that fate as the yardstick. We break this constraint by measuring a paper's idea quality directly from its text, before publication, using a discipline-trained LLM evaluator that scores the idea without seeing author names or outcomes. Using economics as a case study, we combine this text-legible idea-quality score with an execution-quality rubric, a connection index, an author-ability index, and an off-the-shelf language-model text score to estimate a five-input production function for journal placement across 6,208 economics working papers. The inputs are not rivals but a sequence along the ladder of prestige. Execution sets a meritocratic floor and is the largest input overall. Text-legible idea quality grades the rungs in between. Connections set a favoritism ceiling that bites mainly near the apex, the most selective journals. Connections work through two additive channels: connected authors write papers that score higher, and at equal scores their papers are still more likely to place better. Yet this advantage is bounded. Connections raise the odds of every rung without making the apex the typical outcome for ordinary ideas, and even the highest-scoring papers face real friction reaching the visible journal ladder. The result nests, rather than chooses between, the meritocracy and network accounts of how science is published.

We study how economy-wide reputational shocks reshape corporate governance by examining board and executive turnover following the MeToo movement. We conceptualize the October 2017 revelations surrounding Harvey Weinstein as a common information shock that increased the expected cost of misconduct and intensified scrutiny across firms. Identification exploits cross-sectional variation in pre-shock exposure, measured by the frequency of Item 5.02 Form 8-K filings, which proxy for firms' sensitivity to governance-related disclosure and reputational risk. We develop a model of organizational exit in which directors respond to changes in reputational pressure through dynamic, belief-driven resignation hazards, generating heterogeneous and potentially nonlinear responses across firms. Empirically, we implement a continuous-treatment difference-in-differences design and complement it with dynamic event-study and matrix-completion estimators. We find that firms with greater pre-shock exposure experience significantly larger increases in resignation activity following the shock. The effects are concentrated in the immediate aftermath of the Weinstein revelations and are amplified through board-level interactions. The findings provide causal evidence that reputational shocks can induce rapid and systematic governance turnover, highlighting the central role of information, exposure, and organizational adaptation in shaping corporate responses to changes in the reputational environment.

We present a hybrid news sentiment engine that continuously learns market sentiment from paired news headlines and concurrent asset-price snapshots without requiring any neural network training or GPU compute. The system uses a three-way ensemble combining (1) a financial-domain lexicon (FinBERT-style keyword scoring), (2) an adaptive statistical TF-IDF cluster learner that organizes headlines into semantic neighborhoods and tracks their average realized price reactions, and (3) an auto-calibrating weighting mechanism that adjusts ensemble contributions based on each signal's historical correlation with actual price movements. The engine runs on a 3-hour polling cycle from the Tradeflags NewsFeed API, which provides 22 price-snapshot fields per news item spanning equity indices (ES, NQ, SPY, DJIA, NDX, IWM), commodities (CL), and cryptocurrencies (BTC, ETH). All processing occurs at sub-second latency on a CPU-only server at effectively zero marginal cost per analytic cycle. We compare our approach against established methods -- FinBERT, GPT-based scoring, VADER, and commercial sentiment APIs -- across dimensions of cost, latency, accuracy, and adaptability. Our statistical cluster learner, which adapts to changing market regimes without retraining, represents a novel contribution not found in existing sentiment systems.

Financial forecasting is difficult due to low signal-to-noise ratios, latent factors, heavy tails, regime shifts, and jumps. Real-world benchmarks offer limited failure attribution: researchers can observe underperformance, but often cannot isolate why because mechanisms are unobservable and entangled. Real financial data reveal only one realized path, making it difficult to assess tail-risk calibration or data efficiency. We introduce FinStressTS, a mechanism-aware synthetic benchmark that links model behavior to controlled structural causes. FinStressTS comprises 30 diagnostic environments around six mechanism families: volatility clustering, multi-scale persistence, heavy-tailed shocks, regime switching, self-exciting jumps, and zero-inflated processes. We evaluate two tasks: point forecasting, using NMAE across five settings, and probabilistic forecasting, using CRPS under known data-generating mechanisms. We benchmark 15 models, from classical methods (HAR, VAR) to Transformer forecasters (PatchTST, iTransformer) and deep probabilistic architectures (DeepAR, TSFlow), and use learning curves to measure sample efficiency. Our evaluation reveals three insights. First, performance is mechanism-dependent: autoregressive and linear models are highly competitive, and often outperform Transformer-based models, in several volatility-, tail-, and jump-driven environments. Second, distributional alignment matters: parametric probabilistic models such as DeepAR calibrate well in stationary settings, while flexible models can help when distributions become multimodal or sparse. Third, neural models often require more data to match simple baselines, with larger gains mainly when learning latent regimes or complex distributions. FinStressTS provides an open framework for diagnosing failure modes and advancing risk-aware forecasting.

We study optimal portfolio choice for a household simultaneously managing a random-deadline goal, such as a medical emergency or job loss, and a fixed-deadline goal such as retirement or college tuition. Under a forced funding rule, in which each goal is paid in full whenever affordable, the household maximizes a weighted sum of the probabilities of fully funding both goals in a Black--Scholes market. We identify two novel effects absent from single-goal models: a growth crowding-out effect, in which precautionary saving for the random goal distorts investment toward the fixed goal, and a deadline pressure effect, in which a compressed saving horizon forces excess risk-taking. A striking implication is that the value function need not be monotone in wealth: a household just above the random-goal threshold is forced to pay it when the shock arrives, depleting its wealth for the fixed goal, and ends up worse off than a slightly poorer household that missed the random goal but kept its wealth intact. This non-monotonicity is absent from all single-goal benchmarks and arises purely from the interaction between the two goal types under forced funding. We further study an optional funding variant in which the household may decline the fixed-deadline goal at time $T$ rather than being required to fund it. We characterize the ex ante option value, i.e., the full time-$0$ value of this flexibility and the terminal option value, i.e., its value at the funding decision node. We find that both options are most valuable at intermediate wealth levels where paying the fixed-deadline goal would substantially reduce the continuation value of the random-deadline problem.

We analyze intentional block delays (mining gaps) in Proof-of-Work blockchain systems, where miners strategically balance mining rewards against operational costs. Using a game-theoretic model, we derive a Nash equilibrium with optimal mining strategies and establish necessary and sufficient conditions for mining gap existence. We demonstrate that mining gaps, when combined with difficulty adjustment algorithms, can destabilize the system. We propose conditions to address sustainability concerns as block rewards decrease and reliance on transaction fees increases. Our findings are illustrated through a two-player game simulation and an analysis of the Bitcoin network, providing insights for blockchain design and policy. This work contributes to understanding strategic mining behavior and its impact on blockchain stability and efficiency.

We study an infinite-horizon optimal consumption-investment problem for an investor with Epstein-Zin stochastic differential utility with stochastic investment opportunities in an incomplete market. Risk aversion and intertemporal substitution are separated, and we work in the regime $θ\in(0,1)$, where there exists a unique generalised utility process for arbitrary non-negative progressively measurable consumption streams. Our main contribution is a variational characterisation of the value function. We show that the value function is the unique minimiser of a functional whose Euler-Lagrange equation coincides with the Hamilton-Jacobi-Bellman equation. Although the functional may be non-convex, the direct method yields existence, and we prove every minimiser is strictly positive, bounded, and classical. A verification theorem identifies any minimiser with the value function and gives feedback representations for optimal consumption and investment policies. The proof combines a change of measure to the myopic probability with uniqueness results for Epstein-Zin BSDEs and a perturbation argument for optimality. Examples with stochastic volatility, Gaussian excess returns, and fat-tailed excess returns illustrate the scope of the framework and its implications for intertemporal hedging.

AI losses that arise through an insured organization's generative or agentic AI system require state reconstruction, not merely event reconstruction, because the relevant state changes as the system reasons, retrieves, calls tools, and acts. The relevant question is not only what loss occurred, but what the system was allowed to do, what it actually did, and whether that reconstructed loss can support insurance claim recovery. This paper addresses losses in which the insured's AI system is in the causal chain, including externally triggered failures such as prompt injection, retrieval-augmented generation (RAG) poisoning, malicious tool output, credential misuse, and data poisoning. Specifically, this paper introduces CER, a use-case-level diagnostic for AI residual risk transfer. C (control boundary) asks whether the system had an enforceable operating envelope. E (evidence reconstruction) asks whether the system state and causal chain can be reconstructed from retained artifacts. R (insurance response) asks whether the reconstructed loss is insured: whether insurance coverage is available in the market and placed for the insured, together with the proof needed to support insurance claim recovery. The paper makes three contributions: it defines the AI-specific reconstruction problem, operationalizes that problem through CER, and specifies claim-grade evidence for AI reconstruction. Public examples include the reported PocketOS and Replit agentic database-deletion incidents and Moffatt v. Air Canada as an adjudicated output/reliance case. Keywords: AI systems; CER framework; residual risk transfer; agentic AI; generative AI; AI insurance; evidence reconstruction.

We study the robustness of AMM-based on-chain price oracles to strategic manipulation. An attacker trades against constant product automated market makers (CPMMs) to distort an on-chain oracle, arbitrageurs restore cross-pool and cross-venue consistency, and an oracle designer chooses how to aggregate pool quotes. Taking an efficient-market-hypothesis (EMH) view of the off-chain "true" price, we define the \emph{cost of manipulation} as the minimal mark-to-market loss that an attacker must incur to move the oracle by a given multiplicative factor. For independent CPMMs, we derive closed-form single-pool manipulation formulas and solve the attacker-designer game for weighted means and weighted medians, showing that liquidity weights maximize the minimum cost of manipulation within these classes for weighted medians (for any distortion level) and, for weighted means, locally as the distortion tends to zero. For larger distortions, weighted means become more fragile: optimal weights can depend on the target distortion and no single choice is uniformly optimal across distortion levels. In a frictionless CPMM model with cross-pool arbitrage, the manipulation cost depends only on the total quote depth and coincides across symmetric aggregators. We extend this framework to multi-asset star architectures, confirming that liquidity weights remain optimal in the same sense. Finally, we bridge theory and practice by incorporating dwell times and rate limits, providing a quantitative yardstick to size oracles against the explicit economic costs of attack.

This study examines whether standard matching mechanisms function as intended in LLM-agent markets, where LLM agents make allocation-related decisions as delegated decision-makers. We compare decentralized free-negotiation markets with centralized mechanism-based markets including several representative mechanisms. Across controlled one-to-one matching environments, mechanism-based markets generally outperform free negotiation in terms of stability and efficiency. We also find that LLM agents report preferences truthfully at substantially higher rates than human subjects in comparable DA and EADA environments. However, truth-telling is not uniformly aligned with formal strategy-proofness across all mechanisms: TTC, despite being strategy-proof, does not always elicit higher truth-telling than EADA. These results suggest that matching theory provides a useful but incomplete guide for designing institutions in LLM-agent markets.

The standard generalization bounds assume that the training and deployment distributions are the same, or are static, and don't consider regime switching environments where the ratio of calm vs crisis states is different. This paper proposes a framework that generalizes regime-aware models by quantifying the extra risk due to regime composition mismatch, when distribution shifts are Markov-switching. We obtain an exact decomposition, separating regime mismatch from regime sensitivity; we extend the bound to beta-mixing data using the effective sample size corrected for the spectral gap; and we show a minimax lower bound for synthetic data and on 25 years of global equity indices. The proposed penalty is an ex post realized generalization gap, whereas the training-only estimator does not show significant correlation: the feature geometry of crises can be detected, but not the temporal arrival. Thus, the framework is not a forecast machine. Forecasting the composition of the future regime is an open question in the rare cases of regime change.

We study caplet stripping, the problem of recovering a caplet volatility term structure consistent with quoted cap volatilities. Many academic papers on the Libor market model assume caplet volatilities are readily available, whereas practitioners know they are not and extracting them is a complex task. This paper presents a practical workflow, structuring the presentation around a constructive algorithm. We start with criteria on the input data based on cap time-value monotonicity. If time values fail this check, we show how to correct the quotes using robust outlier detection based on the modified Z-score. The time-value proposition naturally leads to a direct non-bootstrap stripping approach by interpolating cap time values, which yields arbitrage-free caplet volatilities by construction. We then revisit the classic sequential bootstrap approach. We introduce compact-kernel transition interpolants (flat-linear and $C^1$ flat-smooth) that preserve bootstrap equivalence. Finally, for a richer, smoother curve, we introduce global search methods using midpoint node placement with positivity-preserving calibration. Pathological cases and detailed analyses of oscillations are provided in the appendix.

RED-2400 is a public benchmark of 6,660 algorithmically-rejected trading events from a live Solana decentralised-exchange filter stack, observed continuously over 22 calendar days (2026-04-10T21:10Z through 2026-05-02T21:48Z, UTC). Each rejection event is linked to its post-rejection price-and-liquidity trajectory. The deposit contains 169,123 forward-outcome observations and 1,837 graveyard-tracker lifecycle snapshots, covering 1,076 distinct mints in the rejection registry and 1,075 in the forward-observation file. Outcome labels follow the five-tier classification rule introduced by a related methodology paper [Kamat 2026c]. The deposit includes a lifecycle-tracker file that permits external validation of any subset of those labels against observed token-lifecycle ground truth. Filter labels are anonymised to filter_1 through filter_8; source-collector identifiers to source_a and source_b. Liquidity and 24-hour volume are quantised to the nearest power of two, preserving heavy-tailed shape while preventing operational-threshold inference. This is the first window of a planned series; subsequent windows will extend the time horizon and enable regime-stratified analysis. "RED-2400" is a brand name, not a count; current cohort sizes are listed below and do not equal 2,400.

This paper develops a model for option market making in which the hedging activity of the market maker generates price impact on the underlying asset. The option order flow is modeled by Cox processes, with intensities depending on the state of the underlying and on the market maker's quoted prices. The resulting dynamics combine stochastic option demand with both permanent and transient impact on the underlying, leading to a coupled evolution of inventory and price. We first study market manipulation and arbitrage phenomena that may arise from the feedback between option trading and underlying impact. We then establish the well-posedness of the mixed control problem, which involves continuous quoting decisions and impulsive hedging actions. Finally, we implement a numerical method based on policy optimization to approximate optimal strategies and illustrate the interplay between option market liquidity, inventory risk, and underlying impact.

We propose a novel conditional diffusion model for contextual portfolio optimization that learns the cross-sectional distribution of next-day stock returns conditioned on high-dimensional asset-specific factors. Our model leverages a Diffusion Transformer architecture with token-wise conditioning, which enables linking each asset's return to its own factor vector while capturing complex cross-asset dependencies. By drawing generative samples from the learned conditional return distribution, we perform daily mean-variance and mean-CVaR optimization, incorporating transaction costs and realistic constraints. Using data from the Chinese A-share market, we demonstrate that our approach consistently outperforms various standard benchmarks across multiple risk-adjusted performance metrics. Furthermore, we establish a 2-Wasserstein error bound for the conditional diffusion model and quantify how its distributional approximation errors propagate to the downstream portfolio optimization task. Our results demonstrate the potential of generative diffusion models for high-dimensional, risk-sensitive contextual stochastic optimization and financial decision making.

Market generators using deep generative models have shown promise for synthetic financial data generation, but existing approaches lack causal reasoning capabilities essential for counterfactual analysis and risk assessment. We propose a Time-series Neural Causal Model VAE (TNCM-VAE) that combines variational autoencoders with structural causal models to generate counterfactual financial time series while preserving both temporal dependencies and causal relationships. Our approach enforces causal constraints through directed acyclic graphs in the decoder architecture and employs the causal Wasserstein distance for training. We validate our method on synthetic autoregressive models inspired by the Ornstein-Uhlenbeck process, demonstrating superior performance in counterfactual probability estimation with L1 distances as low as 0.03-0.10 compared to ground truth. The model enables financial stress testing, scenario analysis, and enhanced backtesting by generating plausible counterfactual market trajectories that respect underlying causal mechanisms.

This paper studies whether interruptions to organized breast cancer screening lead to greater later use of emergency hospital care. It focuses on the first wave of COVID-19, when routine mammography was widely reduced across Europe, disrupting the usual screening pathway of early detection, follow-up testing, referral, and planned treatment. Using SHARE data from eight countries, the authors examine women aged 50 to 69, the main target group for organized screening programs. They estimate how mammography uptake affects all-cause overnight emergency hospitalization, interpreted as a broad measure of downstream strain on the health system after preventive care disruption. To address selection into screening, they use an instrumental variables strategy based on interview timing in Wave 9 interacted with cross-country differences in first-wave restrictions. The results suggest that pandemic-related declines in mammography increased later emergency hospitalization for screening-eligible women, while no such effect appears for women aged 70 and older.

We quantify the short-term impact of Generative Artificial Intelligence (GenAI) on sales performance through a series of large-scale randomized field experiments involving millions of users and products at a leading cross-border online retail platform. Over 2023-2024, the platform integrated GenAI into seven consumer-facing business workflows spanning customer service, consumer-product matching, advertising, and seller services. We find that GenAI adoption increases sales in most workflows, with effects ranging from no detectable impact to $16.3\%$, depending on GenAI's marginal contribution relative to baseline firm practices. Across the four GenAI applications with positive sales effects, the implied annual incremental value is roughly $\$5-$an economically meaningful impact given the retailer's scale and the early stage of GenAI adoption. The gains operate primarily through higher conversion rates rather than larger cart values, consistent with GenAI improving the shopping experience by reducing search, information, communication, and personalization frictions. Importantly, these effects are not associated with worse post-purchase outcomes, as product return rates and customer ratings do not deteriorate. Finally, we document substantial demand-side heterogeneity, with larger gains for less experienced consumers. Our findings provide novel, large-scale causal evidence on how GenAI shapes sales productivity in online retail, highlighting both its immediate value and broader potential.

Incarceration-diversion treatment programs aim to improve societal reintegration and reduce recidivism, but limited capacity forces policymakers to make prioritization decisions that often rely on risk assessment tools. While predictive, these tools typically treat risk as a static, individual attribute, which overlooks how risk evolves over time and how treatment decisions shape outcomes through social interactions. In this paper, we develop a new framework that models reoffending risk as a human-system interaction, linking individual behavior with system-level dynamics and endogenous community feedback. Using an agent-based simulation calibrated to U.S. probation data, we evaluate treatment allocation policies under different capacity constraints and incarceration settings. Our results show that no single prioritization policy dominates. Instead, policy effectiveness depends on temporal windows and system parameters: prioritizing low-risk individuals performs better when long-term trajectories matter, while prioritizing high-risk individuals becomes more effective in the short term or when incarceration leads to shorter monitoring periods. These findings highlight the need to evaluate risk-based decision systems as sociotechnical systems with long-term accountability, rather than as isolated predictive tools.

In this paper, we study an optimal dividend and capital-injection problem in a Cramér--Lundberg model where claim arrivals follow a Hawkes process, capturing clustering effects often observed in insurance portfolios. We establish key analytical properties of the value function and characterise the optimal capital-injection strategy through an explicit threshold. We also show that the value function is the unique viscosity solution of the associated HJB variational inequality. For numerical purposes, we first compute a benchmark solution via a monotone finite-difference scheme with Howard's policy iteration. We then develop a reinforcement learning approach based on policy-gradient and actor-critic methods. The learned strategies closely match the PDE benchmark and remain stable across initial conditions. The results highlight the relevance of policy-gradient techniques for dividend optimisation under self-exciting claim dynamics and point toward scalable methods for higher-dimensional extensions.

Formula alpha mining, which generates predictive signals from financial data, is critical for quantitative investment. Although various algorithmic approaches-such as genetic programming, reinforcement learning, and large language models-have significantly expanded the capacity for alpha discovery, systematic evaluation remains a key challenge. Existing evaluation metrics predominantly include backtesting and correlation-based measures. Backtesting is computationally intensive, inherently sequential, and sensitive to specific strategy parameters. Correlation-based metrics, though efficient, assess only predictive ability and overlook other crucial properties such as temporal stability, robustness, diversity, and interpretability. Additionally, the closed-source nature of most existing alpha mining models hinders reproducibility and slows progress in this field. To address these issues, we propose AlphaEval, a unified, parallelizable, and backtest-free evaluation framework for automated alpha mining models. AlphaEval assesses the overall quality of generated alphas along five complementary dimensions: predictive power, stability, robustness to market perturbations, financial logic, and diversity. Extensive experiments across representative alpha mining algorithms demonstrate that AlphaEval achieves evaluation consistency comparable to comprehensive backtesting, while providing more comprehensive insights and higher efficiency. Furthermore, AlphaEval effectively identifies superior alphas compared to traditional single-metric screening approaches. All implementations and evaluation tools are open-sourced to promote reproducibility and community engagement.

In this paper, we study the effects of fill probabilities and adverse fills on the trading strategy simulation process. We specifically focus on a stochastic optimal control market-making problem and test the strategy on ES (E-mini S\&P 500), NQ (E-mini Nasdaq 100), CL (Crude Oil) and ZN (10-Year Treasury Note), which are some of the most liquid futures contracts listed on the CME (Chicago Mercantile Exchange). We provide empirical evidence that shows how fill probabilities and adverse fills can significantly affect performance and propose a more prudent simulation framework to deal with this. Many previous works aim to measure different types of adverse selection in the limit order book (LOB), however, they often simulate price processes and market orders independently. This has the ability to largely inflate the performance of a short-term style trading strategy. Our studies show that using more realistic fill probabilities and tracking adverse fills in the strategy simulation process more accurately shows how these types of trading strategies would perform in reality.

We are considering the problem of optimal portfolio delegation between an investor and a portfolio manager under a random default time. We focus on a novel variation of the Principal-Agent problem adapted to this framework. We address the challenge of an uncertain investment horizon caused by an exogenous random default time, after which neither the agent nor the principal can access the market. This uncertainty introduces significant complexities in analyzing the problem, requiring distinct mathematical approaches for two cases: when the random default time falls within the initial time frame [0,T] and when it extends beyond this period. We develop a theoretical framework to model the stochastic dynamics of the investment process, incorporating the random default time. We then analyze the portfolio manager's investment decisions and compensation mechanisms for both scenarios. In the first case, where the default time could be unbounded, we apply traditional results from Backward Stochastic Differential Equations (BSDEs) and control theory to address the agent problem. In the second case, where the default time is within the interval [0,T], the problem becomes more intricate due to the degeneracy of the BSDE's driver. For both scenarios, we demonstrate that the contracting problem can be resolved by examining the existence of solutions to integro-partial Hamilton-Jacobi-Bellman (HJB) equations in both situations. We develop a deep-learning algorithm to solve the problem in high-dimension with no access to the optimizer of the Hamiltonian function.

A continuous-time financial portfolio selection model with expected utility maximization typically boils down to solving a (static) convex stochastic optimization problem in terms of the terminal wealth, with a budget constraint. In literature the latter is solved by assuming {\it a priori} that the problem is well-posed (i.e., the supremum value is finite) and a Lagrange multiplier exists (and as a consequence the optimal solution is attainable). In this paper it is first shown, via various counter-examples, neither of these two assumptions needs to hold, and an optimal solution does not necessarily exist. These anomalies in turn have important interpretations in and impacts on the portfolio selection modeling and solutions. Relations among the non-existence of the Lagrange multiplier, the ill-posedness of the problem, and the non-attainability of an optimal solution are then investigated. Finally, explicit and easily verifiable conditions are derived which lead to finding the unique optimal solution.

In this paper, we present a probabilistic numerical algorithm combining dynamic programming, Monte Carlo simulations and local basis regressions to solve non-stationary optimal multiple switching problems in infinite horizon. We provide the rate of convergence of the method in terms of the time step used to discretize the problem, of the size of the local hypercubes involved in the regressions, and of the truncating time horizon. To make the method viable for problems in high dimension and long time horizon, we extend a memory reduction method to the general Euler scheme, so that, when performing the numerical resolution, the storage of the Monte Carlo simulation paths is not needed. Then, we apply this algorithm to a model of optimal investment in power plants. This model takes into account electricity demand, cointegrated fuel prices, carbon price and random outages of power plants. It computes the optimal level of investment in each generation technology, considered as a whole, w.r.t. the electricity spot price. This electricity price is itself built according to a new extended structural model. In particular, it is a function of several factors, among which the installed capacities. The evolution of the optimal generation mix is illustrated on a realistic numerical problem in dimension eight, i.e. with two different technologies and six random factors.

We consider $N$ Bernoulli random variables, which are independent conditional on a common random factor determining their probability distribution. We show that certain expected functionals of the proportion $L_N$ of variables in a given state converge at rate $1/N$ as $N\rightarrow \infty$. Based on these results, we propose a multi-level simulation algorithm using a family of sequences with increasing length, to obtain estimators for these expected functionals with a mean-square error of $ε^2$ and computational complexity of order $ε^{-2}$, independent of $N$. In particular, this optimal complexity order also holds for the infinite-dimensional limit. Numerical examples are presented for tranche spreads of basket credit derivatives.

It is shown how to obtain accurate values for American options using Monte Carlo simulation. The main feature of the novel algorithm consists of tracking the boundary between exercise and hold regions via optimization of a certain payoff function. We compare estimates from simulation for some types of claims with results from binomial tree calculations and find very good agreement. The novel method allows to calculate so far untractable path-dependent option values.

This paper considers the optimal dividend payment problem in piecewise-deterministic compound Poisson risk models. The objective is to maximize the expected discounted dividend payout up to the time of ruin. We provide a comparative study in this general framework of both restricted and unrestricted payment schemes, which were only previously treated separately in certain special cases of risk models in the literature. In the case of restricted payment scheme, the value function is shown to be a classical solution of the corresponding HJB equation, which in turn leads to an optimal restricted payment policy known as the threshold strategy. In the case of unrestricted payment scheme, by solving the associated integro-differential quasi-variational inequality, we obtain the value function as well as an optimal unrestricted dividend payment scheme known as the barrier strategy. When claim sizes are exponentially distributed, we provide easily verifiable conditions under which the threshold and barrier strategies are optimal restricted and unrestricted dividend payment policies, respectively. The main results are illustrated with several examples, including a new example concerning regressive growth rates.

We propose and analyze numerical methods for the Heath-Jarrow-Morton (HJM) model. To construct the methods, we first discretize the infinite dimensional HJM equation in maturity time variable using quadrature rules for approximating the arbitrage-free drift. This results in a finite dimensional system of stochastic differential equations (SDEs) which we approximate in the weak and mean-square sense using the general theory of numerical integration of SDEs. The proposed numerical algorithms are computationally highly efficient due to the use of high-order quadrature rules which allow us to take relatively large discretization steps in the maturity time without affecting overall accuracy of the algorithms. Convergence theorems for the methods are proved. Results of some numerical experiments with European-type interest rate derivatives are presented.