2016 INFORMS Annual Meeting Program

SB43

INFORMS Nashville – 2016

SB41 207C-MCC Spectral Methods in Finance: Option Pricing and Econometrics Sponsored: Financial Services Sponsored Session

2 - How to Train Your Lawyer Ephrat Bitton, Future Advisor, ephratb@gmail.com

For better or worse, Robo Advisors operate in a highly regulated industry. Folks may roll their eyes at the mention of compliance, but it is a crucial process for ensuring that we protect the end client. As a mathematician at FutureAdvisor, one of my greater challenges is adequately describing to our compliance officer how we manage portfolios using optimization. MILP can be immensely powerful for solving complex decision problems, but it is notoriously difficult to pinpoint the reasons for different outcomes. This talk follows my story on automating portfolio management, ensuring the quality of our results, and finally, explaining how it all works to someone who reads legal settlements for fun. 3 - Pricing And Hedging Guaranteed Minimum Withdrawal Benefit With High Water Mark Benefit Base Peiqi Wang, Princeton University, Princeton, NJ, United States, peiqiw@princeton.edu, Patrick Cheridito We consider pricing and hedging of Guaranteed Minimum Withdrawal Benefit (GMWB) rider on a variable annuity (VA) contract. We price the VA+GMWB contract by considering the optimal withdrawal strategy of the policyholder. We show that policyholder’s payoff resulting from the optimal withdrawal strategy corresponds to the super-replication cost of the contract and we provide a hedging strategy. Our numerical results show that it is sometimes optimal for the policyholder to aggressively withdraw and ruin the account. Further analysis on the numerical results suggests how the insurer should determine the fee structure and minimal deposit requirement. 4 - About Holistic Robo-advice Engine Dan Dibartolomeo, Northfield Information, dan@northinfo.com Robo-advisors aim to attract non high-net-worth individual investors by significantly lowering the entry barrier to professional wealth management industry. Unfortunately, existing schemes of robo-advisors have not been sophisticated enough to provide fully personalized investment advices. However, it surely is challenging to ask clients, who might lack financial literacy, to provide their detailed financial situation through online platform. Therefore, we propose a goal-based investment model that only requires the input of wealth, income, and consumption goals with priorities via multi-stage stochastic programming approach. SB43 208A-MCC Systems Engineering and Decision Analysis Sponsored: Decision Analysis Sponsored Session Chair: Robert F Bordley, PMP, MBA, Booz Allen Hamilton, Troy, MI, United States, bordley_robert@bah.com 1 - Value-focused Thinking For Engineering Resilient Systems Greg Parnell, University of Arkansas, gparnell@uark.edu DoD’s requirements analysis identifies Key Performance Parameters to meet the system goals. The acquisition documents identify the thresholds and objectives for each parameter that are supported by mission analysis that considers mission needs, technical maturity, affordability, and schedule. Multiple objective decision analysis and Value-Focused Thinking can provide a mathematical framework for evaluating the resilience of systems in mission scenarios under uncertainty and the adaptability of the platform to future missions. 2 - The Systems Engineering Approach To Setting Design Targets Robert Bordley, Booz Allen Hamilton, bordley_robert@bah.com Systems engineering is a value-focused process aimed at defining feasible component-level design targets for a system which, when designed and assembled, will best meet the needs of system stakeholders. To reach this goal, systems engineering first defines targets at the system level, then at the subsystem level, the assembly level etc down to the component level. At each level, informed trade-offs are made about what is most appealing to stakeholders given beliefs about what is technically possible. Making these tradeoffs involves specifying alternative solutions, investigating each solution and constructing an optimal hybrid of the solutions. 3 - A Bayesian Method For Selecting Elite Varieties Of Soybean Jack Kloeber, Kromite, LLC, 82 Nelson Drive, Churchville, PA, 18966, United States, jkloeber@kromite.com, Joseph Byrum, Tracy Doubler, Greg Doonan, Craig Davis, Peiran Zhao In agriculture R&D, a new variety’s genetic contribution to higher yield is difficult to separate from factors of soil, insects, weather, or agronomic practices. Varieties are grown at multiple locations, downselecting over 4 years. Syngenta developed a generalizable method which helps soy breeders find the genetic winner using Bayesian Updating. The increased accuracy leads to better decision-making and higher yield.

Chair: Lingfei Li, Assistant Professor, The Chinese University of Hong Kong, 608 William M.W.Mong Engineerng Building, Shatin, N.T., none, Hong Kong, lfli@se.cuhk.edu.hk 1 - Error Analysis Of Finite Difference And Markov Chain Approximations For Option Pricing With Non-smooth Payoffs Gongqiu Zhang, PhD Candidate, The Chinese University of Hong Kong, ERB 802, Hong Kong, gqzhang@se.cuhk.edu.hk, Lingfei Li We provide error analysis for finite difference and Markov Chain approximations in option pricing when the payoff function is non-smooth. We assume the asset price is a one-dimensional diffusion or a jump process constructed from a diffusion by subordination. We show that the spatial discretization error is second order for call and put-type payoffs and first order for digital-type payoffs. Furthermore, averaging discontinuous payoffs can restore second order convergence. 2 - Long Forward Probabilities, Recovery And The Term Structure Of Bond Risk Premiums Likuan Qin, Northwestern University, Evanston, IL, 60016, United States, likuan.qin@gmail.com, Vadim Linetsky We show that the martingale component in the long-term factorization of the stochastic discount factor due to Alvarez and Jermann (2005) and Hansen and Scheinkman (2009) is highly volatile, produces a downward-sloping term structure of bond Sharpe ratios, and implies that the long bond is far from growth optimality. In contrast, the long forward probabilities forecast an upward sloping term structure of bond Sharpe ratios and implies that the long bond is growth optimal. Thus, transition independence and degeneracy of the martingale We develop a two-step procedure to estimate a class of jump processes known as subordinate diffusions from discrete-time data. The first step identifies the diffusion parameters using estimating functions only involve diffusion parameters and the second step identifies the subordinator parameters using martingale estimating functions based on eigenfunctions. Under regularity conditions, our estimators are consistent and asymptotically normal. Numerical examples show that our method is statistically and computationally efficient. Analysis of VIX index indicates that a pure jump subordinate diffusion model significantly outperforms diffusion models in modeling the VIX index. SB42 207D-MCC Quantitative Methods in Finance XIII Sponsored: Financial Services Sponsored Session Chair: Changle Lin, Princeton University, Jersey City, NJ, United States, changlel@princeton.edu Co-Chair: Woo Chang Kim, Associate Professor, KAIST, KAIST 291, Daehak-ro, Yuseong-gu, Daejeon, 34141, Korea, Republic of, wkim@kaist.ac.kr 1 - Goal-based Investment Via Multi-stage Stochastic Programming For Robo Advisor Service Woo Chang Kim, KAIST, wkim@kaist.ac.kr Robo-advisors aim to attract non high-net-worth individual investors by signifi- cantly lowering the entry barrier to professional wealth management industry. Unfortunately, existing schemes of robo-advisors have not been sophisticated enough to provide fully personalized investment advices. However, it surely is challenging to ask clients, who might lack financial literacy, to provide their detailed financial situation through online platform. Therefore, we propose a goal-based investment model that only requires the input of wealth, income, and consumption goals with priorities via multi-stage stochastic programming approach. component are implausible assumptions in the bond market. 3 - Parametric Inference Of Discretely Observed Subordinate Diffusions Weiwei Guo, The Chinese University of Hong Kong, wwguo@se.cuhk.edu.hk

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