FRE Special Seminar: David Shimko & Julio Backhoff

David Shimko, NYU Tandon

Title

Cash Capital, Risk Capital, and Valuation

Abstract

The assumption that "risk premium adjustment" is a percentage of an asset's value dates back to classical works of Markowitz's portfolio theory, Sharpe's CAPM, and even Harrison/Kreps/Pliska's first fundamental theorem of finance. We explore an alternative theoretical foundation for finance where the cost of risk is generalized to any risk measure multiplied by a constant cost per unit. We also separate the cost of money from the cost of risk. This simple generalization reveals that all valuation formulas in finance are applications and special cases of a general valuation equation (GVE) including riskless cash flow sequences, risky cash flows, derivative instruments (continuous and discrete), and cash flows defined by stochastic processes. This model also addresses correlated cash flows across time. Finally, the model resolves the long-standing "convergence question", which is, "Why do financial institutions use valuation models that differ from those taught in finance textbooks?"

Bio

David Shimko started his academic career at the University of Southern California. He went to JPMorgan as Head of Commodity Derivatives Research where he designed custom structures, valuation, and analyses for global commodity clients. At Bankers Trust, he headed the Risk Management Consulting function for external clients. He left to form "Risk Capital" a firm that consulted to corporate, exchange, financial institution, government agency, and sovereign clients for 20 years before joining NYU Tandon.

Julio Backhoff, University of Vienna

Title

On the Specific Relative Entropy Between Continuous Martingales

Abstract

The laws of two continuous martingales will typically be singular to each other and hence have infinite relative entropy. But this does not need to happen in discrete time. This suggests defining a new object, the specific relative entropy, as a scaled limit of the relative entropy between the discretized laws of the martingales. This definition goes all the way back to Nina Gantert's PhD thesis, and in recent times Hans Foellmer has rekindled the study of this object by for instance obtaining a novel transport-information inequality.

In this talk, I will first discuss the existence of a closed formula for the specific relative entropy, depending on the quadratic variation of the involved martingales. Next, I will describe an application of this object to prediction markets. Concretely, David Aldous asked in an open question to determine the 'most exciting game', i.e. the prediction market with the highest entropy. With M. Beiglbock we give a concise answer to this question. Finally, if time permits, I will give a glimpse to different extensions of this object, e.g. to higher dimensions or when we replace the role of the relative entropy by a power of the Wasserstein distance.

Bio

Julio completed his undergraduate studies at the University of Chile in Santiago de Chile. Then, he completed his PhD at Humboldt-University Berlin in 2015. After that, Julio worked as a postdoc at the University of Vienna and Vienna University of Technology. He moved to University of Twente in The Netherlands for a tenure-track position in 2019. From 2021, he returned back to the University of Vienna as an assistant professor (tenure-track) in the Probability and Mathematical Finance group at the Faculty of Mathematics. The focus of his research is stochastic optimal transport.

Meeting ID: 988 4034 5184
Password: DSSHCJB213