## Fachbereich Mathematik

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- Advantage of Filtering for Portfolio Optimization in Financial Markets with Partial Information (2016)
- In a financial market we consider three types of investors trading with a finite time horizon with access to a bank account as well as multliple stocks: the fully informed investor, the partially informed investor whose only source of information are the stock prices and an investor who does not use this infor- mation. The drift is modeled either as following linear Gaussian dynamics or as being a continuous time Markov chain with finite state space. The optimization problem is to maximize expected utility of terminal wealth. The case of partial information is based on the use of filtering techniques. Conditions to ensure boundedness of the expected value of the filters are developed, in the Markov case also for positivity. For the Markov modulated drift, boundedness of the expected value of the filter relates strongly to port- folio optimization: effects are studied and quantified. The derivation of an equivalent, less dimensional market is presented next. It is a type of Mutual Fund Theorem that is shown here. Gains and losses eminating from the use of filtering are then discussed in detail for different market parameters: For infrequent trading we find that both filters need to comply with the boundedness conditions to be an advan- tage for the investor. Losses are minimal in case the filters are advantageous. At an increasing number of stocks, again boundedness conditions need to be met. Losses in this case depend strongly on the added stocks. The relation of boundedness and portfolio optimization in the Markov model leads here to increasing losses for the investor if the boundedness condition is to hold for all numbers of stocks. In the Markov case, the losses for different numbers of states are negligible in case more states are assumed then were originally present. Assuming less states leads to high losses. Again for the Markov model, a simplification of the complex optimal trading strategy for power utility in the partial information setting is shown to cause only minor losses. If the market parameters are such that shortselling and borrowing constraints are in effect, these constraints may lead to big losses depending on how much effect the constraints have. They can though also be an advantage for the investor in case the expected value of the filters does not meet the conditions for boundedness. All results are implemented and illustrated with the corresponding numerical findings.

- Global existence for a go-or-grow multiscale model for tumor invasion with therapy (2016)
- We investigate a PDE-ODE system describing cancer cell invasion in a tissue network. The model is an extension of the multiscale setting in [28,40], by considering two subpopulations of tumor cells interacting mutually and with the surrounding tissue. According to the go-or-grow hypothesis, these subpopulations consist of moving and proliferating cells, respectively. The mathematical setting also accommodates the effects of some therapy approaches. We prove the global existence of weak solutions to this model and perform numerical simulations to illustrate its behavior for different therapy strategies.

- Ranking Robustness and its Application to Evacuation Planning (2016)
- We present a new approach to handle uncertain combinatorial optimization problems that uses solution ranking procedures to determine the degree of robustness of a solution. Unlike classic concepts for robust optimization, our approach is not purely based on absolute quantitative performance, but also includes qualitative aspects that are of major importance for the decision maker. We discuss the two variants, solution ranking and objective ranking robustness, in more detail, presenting problem complexities and solution approaches. Using an uncertain shortest path problem as a computational example, the potential of our approach is demonstrated in the context of evacuation planning due to river flooding.

- Zone-based, Robust Flood Evacuation Planning (2016)
- We consider the problem to evacuate several regions due to river flooding, where sufficient time is given to plan ahead. To ensure a smooth evacuation procedure, our model includes the decision which regions to assign to which shelter, and when evacuation orders should be issued, such that roads do not become congested. Due to uncertainty in weather forecast, several possible scenarios are simultaneously considered in a robust optimization framework. To solve the resulting integer program, we apply a Tabu search algorithm based on decomposing the problem into better tractable subproblems. Computational experiments on random instances and an instance based on Kulmbach, Germany, data show considerable improvement compared to an MIP solver provided with a strong starting solution.

- Linear diffusions conditioned on long-term survival (2016)
- We investigate the long-term behaviour of diffusions on the non-negative real numbers under killing at some random time. Killing can occur at zero as well as in the interior of the state space. The diffusion follows a stochastic differential equation driven by a Brownian motion. The diffusions we are working with will almost surely be killed. In large parts of this thesis we only assume the drift coefficient to be continuous. Further, we suppose that zero is regular and that infinity is natural. We condition the diffusion on survival up to time t and let t tend to infinity looking for a limiting behaviour.

- Approximation of Ellipsoids Using Bounded Uncertainty Sets (2016)
- In this paper, we discuss the problem of approximating ellipsoid uncertainty sets with bounded (gamma) uncertainty sets. Robust linear programs with ellipsoid uncertainty lead to quadratically constrained programs, whereas robust linear programs with bounded uncertainty sets remain linear programs which are generally easier to solve. We call a bounded uncertainty set an inner approximation of an ellipsoid if it is contained in it. We consider two different inner approximation problems. The first problem is to find a bounded uncertainty set which sticks close to the ellipsoid such that a shrank version of the ellipsoid is contained in it. The approximation is optimal if the required shrinking is minimal. In the second problem, we search for a bounded uncertainty set within the ellipsoid with maximum volume. We present how both problems can be solved analytically by stating explicit formulas for the optimal solutions of these problems. Further, we present in a computational experiment how the derived approximation techniques can be used to approximate shortest path and network flow problems which are affected by ellipsoidal uncertainty.

- Utility-Based Risk Measures and Time Consistency of Dynamic Risk Measures (2016)
- This thesis deals with risk measures based on utility functions and time consistency of dynamic risk measures. It is therefore aimed at readers interested in both, the theory of static and dynamic financial risk measures in the sense of Artzner, Delbaen, Eber and Heath [7], [8] and the theory of preferences in the tradition of von Neumann and Morgenstern [134]. A main contribution of this thesis is the introduction of optimal expected utility (OEU) risk measures as a new class of utility-based risk measures. We introduce OEU, investigate its main properties, and its applicability to risk measurement and put it in perspective to alternative risk measures and notions of certainty equivalents. To the best of our knowledge, OEU is the only existing utility-based risk measure that is (non-trivial and) coherent if the utility function u has constant relative risk aversion. We present several different risk measures that can be derived with special choices of u and illustrate that OEU reacts in a more sensitive way to slight changes of the probability of a financial loss than value at risk (V@R) and average value at risk. Further, we propose implied risk aversion as a coherent rating methodology for retail structured products (RSPs). Implied risk aversion is based on optimal expected utility risk measures and, in contrast to standard V@R-based ratings, takes into account both the upside potential and the downside risks of such products. In addition, implied risk aversion is easily interpreted in terms of an individual investor's risk aversion: A product is attractive (unattractive) for an investor if its implied risk aversion is higher (lower) than his individual risk aversion. We illustrate this approach in a case study with more than 15,000 warrants on DAX ® and find that implied risk aversion is able to identify favorable products; in particular, implied risk aversion is not necessarily increasing with respect to the strikes of call warrants. Another main focus of this thesis is on consistency of dynamic risk measures. To this end, we study risk measures on the space of distributions, discuss concavity on the level of distributions and slightly generalize Weber's [137] findings on the relation of time consistent dynamic risk measures to static risk measures to the case of dynamic risk measures with time-dependent parameters. Finally, this thesis investigates how recursively composed dynamic risk measures in discrete time, which are time consistent by construction, can be related to corresponding dynamic risk measures in continuous time. We present different approaches to establish this link and outline the theoretical basis and the practical benefits of this relation. The thesis concludes with a numerical implementation of this theory.

- Recursive Utility and Stochastic Differential Utility: From Discrete to Continuous Time (2016)
- In this thesis, mathematical research questions related to recursive utility and stochastic differential utility (SDU) are explored. First, a class of backward equations under nonlinear expectations is investigated: Existence and uniqueness of solutions are established, and the issues of stability and discrete-time approximation are addressed. It is then shown that backward equations of this class naturally appear as a continuous-time limit in the context of recursive utility with nonlinear expectations. Then, the Epstein-Zin parametrization of SDU is studied. The focus is on specifications with both relative risk aversion and elasitcity of intertemporal substitution greater that one. A concave utility functional is constructed and a utility gradient inequality is established. Finally, consumption-portfolio problems with recursive preferences and unspanned risk are investigated. The investor's optimal strategies are characterized by a specific semilinear partial differential equation. The solution of this equation is constructed by a fixed point argument, and a corresponding efficient and accurate method to calculate optimal strategies numerically is given.

- New Aspects of Inflation Modeling (2016)
- Inflation modeling is a very important tool for conducting an efficient monetary policy. This doctoral thesis reviewed inflation models, in particular the Phillips curve models of inflation dynamics. We focused on a well known and widely used model, the so-called three equation new Keynesian model which is a system of equations consisting of a new Keynesian Phillips curve (NKPC), an investment and saving (IS) curve and an interest rate rule. We gave a detailed derivation of these equations. The interest rate rule used in this model is normally determined by using a Lagrangian method to solve an optimal control problem constrained by a standard discrete time NKPC which describes the inflation dynamics and an IS curve that represents the output gaps dynamics. In contrast to the real world, this method assumes that the policy makers intervene continuously. This means that the costs resulting from the change in the interest rates are ignored. We showed also that there are approximation errors made, when one log-linearizes non linear equations, by doing the derivation of the standard discrete time NKPC. We agreed with other researchers as mentioned in this thesis, that errors which result from ignoring such log-linear approximation errors and the costs of altering interest rates by determining interest rate rule, can lead to a suboptimal interest rate rule and hence to non-optimal paths of output gaps and inflation rate. To overcome such a problem, we proposed a stochastic optimal impulse control method. We formulated the problem as a stochastic optimal impulse control problem by considering the costs of change in interest rates and the approximation error terms. In order to formulate this problem, we first transform the standard discrete time NKPC and the IS curve into their high-frequency versions and hence into their continuous time versions where error terms are described by a zero mean Gaussian white noise with a finite and constant variance. After formulating this problem, we use the quasi-variational inequality approach to solve analytically a special case of the central bank problem, where an inflation rate is supposed to be on target and a central bank has to optimally control output gap dynamics. This method gives an optimal control band in which output gap process has to be maintained and an optimal control strategy, which includes the optimal size of intervention and optimal intervention time, that can be used to keep the process into the optimal control band. Finally, using a numerical example, we examined the impact of some model parameters on optimal control strategy. The results show that an increase in the output gap volatility as well as in the fixed and proportional costs of the change in interest rate lead to an increase in the width of the optimal control band. In this case, the optimal intervention requires the central bank to wait longer before undertaking another control action.

- Global existence for a degenerate haptotaxis model of tumor invasion under the go-or-grow dichotomy hypothesis (2016)
- We propose and study a strongly coupled PDE-ODE-ODE system modeling cancer cell invasion through a tissue network under the go-or-grow hypothesis asserting that cancer cells can either move or proliferate. Hence our setting features two interacting cell populations with their mutual transitions and involves tissue-dependent degenerate diffusion and haptotaxis for the moving subpopulation. The proliferating cells and the tissue evolution are characterized by way of ODEs for the respective densities. We prove the global existence of weak solutions and illustrate the model behaviour by numerical simulations in a two-dimensional setting.