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Other references of the project:



1. Dynamic programming for portfolio optimization: in the Markovian setting one can associate to a portfolio
optimization problem a partial differential equation that the value function is expected to solve, in a
suitable sense. One may investigate existence, uniqueness and regularity of solutions to such PDEs.
*Prerequisites*: some familiarity with PDEs would be desirable.
2. Hedging and optimization in incomplete markets: in this very vast field, one can thoroughly study one of the
many problems, and try to consider an original case.
3. Affine processes in the modeling of the term structure of interest rates.
4. Option pricing by Fourier transform techniques. *Prerequisites*: elementary knowledge of (undergraduate)
Fourier analysis would be desirable.
5. Enlargement and shrinking of filtrations and applications (e.g. to models of insider trading).
*Prerequisites*: previous exposure to (at least) measure-theoretic probability is essential.
6. Backward stochastic differential equations and applications to pricing and hedging. *Prerequisites*: see
7. Properties of CIR equations: existence, positivity, and connection with Bessel process.


*CME-LCH Basis *
In recent years, regulators have encouraged banks to use clearing houses as
a means of diluting counterparty exposure and to improve market
transparency for financial derivatives. During 2015 a difference opened up
between the prices of interest rate swaps cleared on the London Clearing
House (LCH) and the Chicago Mercantile Exchange (CME), two of the world's
major clearing houses. Apparently an arbitrage, this difference has
persisted into 2016 at levels multiple times the size of the bid-offer for
these products.
- What has caused this 'arbitrage', and why have arbitrageurs not
intervened to remove it?
- Which financial derivatives are affected by the CME-LCH basis, and how?
- Develop a computationally inexpensive model for the CME-LCH basis,
calibrated to the basis for on-market interest rate swaps, and demonstrate
the impact of the model on the valuations of off-market swaps and European

This project is on credit migration. The credit migration model introduced
by (amongst others) Jarrow, Lando and Turnbull in the late 1990s seeks to
explain the credit spread dynamics of a particular issuer via credit rating
transitions, which are encapsulated in a Markov chain transition matrix. I
want to analyse and model the time variability of this matrix, through a
stochastic time change in which during periods of stress "time speeds up"
and higher densities of rating transition are observed, including
transition to default. The stochastic time change could arise through an
integrated CIR process or Levy process. The annual S&P ratings report
contains enough data (1981-2015) that are necessary to do some useful work
on this. We may also extend the model to take into account market spread
levels, thereby having an extended model that combines historical and
market-implied or "risk-neutral" probabilities.
The project will involve some programming, including optimisation, and data

*Hedging of Out-of-the-Money Interest Rate Options *
Prior to 2008, long term interest rates in developed markets have tended to
be about 5% or higher, whereas they have since hovered around historical
lows of about 2%. As it is common for interest rate products to be done at
the prevailing interest rate environment, many European and Bermudan
swaptions were done based on a strike around 5%. Given these tend to be
very long-dated (say 30y), we currently still have a lot of legacy high
strike swaptions in the inventory of financial institutions, with a long
time to maturity (say over 20y).
Traditionally, risk of options are managed via delta and vega hedging. How
would the hedging of these high strike options have performed over the past
history since 2008? What implications are there for us if rates stay low
for much longer?

*Sensitivity of operational risk capital allocation on the model threshold*

The Basel committee which regulates the banking industry promotes prudent
risk management practices and requires banks to carry out their own models
on internal data sets to evaluate amounts of capital necessary to face
operational risks (ex-AMA, ICAAP, CCaR, etc.). The banks are given a
freedom (to certain extend) to set the threshold as the minimum value of
operational losses to be included in the capital calculation. This
threshold is often referred to as the model threshold.

The standard method for the operational risk capital calculation is to use
the risk measure Value at Risk (VaR). However, the model threshold on the
risk data strongly influences the value of the risk measure VaR, in turn
the capital calculation.

This project aims at analysing the sensitivity of the operational risk

capital value on the model threshold.

Background knowledge:

Basic knowledge on operational risk, terminology and concepts

Knowledge on VaR;

Software and Packages:

We will run the codes in R, so prior experience in R would be


*Title: The exponent expansion and the Inhomogeneous Geometric Brownian
motion with time dependent coefficients*

The aim of the project is to apply a semi-analytical approximation known as

exponent expansion [1,2] to the calculation Arrow-Debreu prices of the
so-called inhomogeneous geometric Brownian motion with time dependent

You will develop the semi-analytical calculation of zero coupon bonds and
interest rate swaptions and compare the results with those obtained by
means of hand coded Partial Differential equations.

*2) Title: Pricing of high-dimensional American options by neural networks*

The aim of the project is to compare the performance of standard least

square regression methods [1,2] and artificial neural networks [3] for the
approximation of the exercise boundary of American and Bermudan options in
Monte Carlo.

You will develop the required Monte Carlo algorithms and compare the
performance on several examples of financial relevance.

*Investigating mechanisms leading to volatility clustering using
agent-based models*
While volatility clustering is considered to be a classical stylised fact
observed in financial asset price time-series, no consensus has been
reached about the behavioural mechanisms of market participants that may
give rise to such observations.

This project will consist of:

A Critical evaluation of key literature concerning
agent-based models.
Developing an understanding of multifractality in
financial time-series.
Develop/extend an agent based model, and a comparison
of the model output with that of classical statistical models.

Prerequisite: A basic background of statistical/probabilistic methods, and

a familiarity with basic programming that will be used to develop an
agent-based model.

*Evolution of decisions on choice*

The project work will use nonlinear ordinary differential equations to

model the evolution of decisions on choice, e.g. where to trade, where to
migrate to, where to invest when several options are available. This is
constrained by resources or government limits, which act as nonlinear
feedback to determine the growth or decay of the individual choices and
also the winning choice. The effects of gradual or sudden changes in
resources or policy are of interest, as are the influences of the modelling
parameters and the numbers of choices available. Data on the web and
comparisons with alternative approaches will be sought as time allows.

*Importance sampling methods applied to stochastic Lagrangian models of
Transport in the atmospheric boundary layer can be modelled by a set of
stochastic differential equations. Sometimes, the problem of interest is to
calculate the expected transport between two localised regions (in space in
time). The project will explore importance sampling methods (Milstein's
method, Go-with-the-winners) with the aim of improving the efficiency of
the calculation.
Below are the guidelines:

*MSc Project Guidelines and Information*

The FM MSc project MATHG099 contributes for 1/3 to the overall MSc mark,
with the 8 taught components adding up to the remaining 2/3. Please see
the Course
of FM Booklet for more information regarding the overall MSc mark and types
of degree.
General Project Guidelines
The MSc project can range from an extensive survey and critique of existing
research to the development of a new model or an extension of an existing
one. Each project will be assessed taking into account where the main focus
of effort lies. A component of original research is not a requirement of
the project, but will be given due credit if present. A student should
discuss these details with their supervisor.
Whatever the student decides with their supervisor, there are some parts
that all projects should include:
- An introduction outlining the project and giving a clear statement of
the objectives of the project.
- Details of mathematical calculations that can be checked. Where it
makes the text more readable, an appendix could be used for some of the
- Clear referencing of all material sourced, whether from books,
published journals, the internet, personal communication, etc.
if it is not the students idea or work, it needs to be referenced.
to reference material may be construed as plagiarism. The college takes a
firm stance on plagiarism. If in doubt the student should ask the
advice of
their supervisor.
- Conclusions, including a summary of the project findings, and, where
new research was carried out, a discussion of the strengths and weaknesses

of the model/method, and possible improvements.

Style and Presentation
It is expected that the MSc thesis be written with the free LaTex
typesetting software. Some marks will be awarded for the quality of the
written work, including its readability, clarity of argument and overall
presentation. There is no word limit for the dissertation.
It is expected that the students work independently. The supervisor is
available for guidance and research advice.
The pass mark for the project is 50%. The project will be assessed
according to the following marking scheme:
- Presentation, style and elegance (max. 20 points)
- Diligence, care and thoroughness (max. 20 points)
- Selection of sources and references, and the scope and depth of
literature review (max. 20 points)
- Elements of originality, critical thought and analysis, and
mathematical sophistication (max. 40 points)