The tail dependence of multivariate distributions is frequently studied via the tool of copulas. In this paper we develop a general method, which is based on multivariate regular variation, to evaluate the tail dependence of heavy-tailed scale mixtures of multivariate distributions, whose copulas are not explicitly accessible. Tractable formulae for tail dependence parameters are derived, and a sufficient condition under which the parameters are monotone with respect to the heavy tail index is obtained. The multivariate elliptical distributions are discussed to illustrate the results.

We introduce a class of stock models that interpolates between exponential Lévy models based on Brownian subordination and certain stochastic volatility models with Lévy-driven volatility, such as the Barndorff-Nielsen–Shephard model. The driving process in our model is a Brownian motion subordinated to a business time which is obtained by convolution of a Lévy subordinator with a deterministic kernel. We motivate several choices of the kernel that lead to volatility clusters while maintaining the sudden extreme movements of the stock. Moreover, we discuss some statistical and path properties of the models, prove absence of arbitrage and incompleteness, and explain how to price vanilla options by simulation and fast Fourier transform methods.

Let X1, X2, …, Xn be independent random variables uniformly distributed on [0,1]. We observe these sequentially and have to stop on exactly one of them. No recall of preceding observations is permitted. What stopping rule minimizes the expected rank of the selected observation? What is the value of the expected rank (as a function of n) and what is the limit of this value when n goes to ∞? This full-information expected selected-rank problem is known as Robbins' problem of minimizing the expected rank, and its general solution is unknown. In this paper we provide an alternative approach to Robbins' problem. Our model is similar to that of Gnedin (2007). For this, we consider a continuous-time version of the problem in which the observations follow a Poisson arrival process on ℝ+ × [0,1] of homogeneous rate 1. Translating the previous optimal selection problem in this setting, we prove that, under reasonable assumptions, the corresponding value function w(t) is bounded and Lipschitz continuous. Our main result is that the limiting value of the Poisson embedded problem exists and is equal to that of Robbins' problem. We prove that w(t) is differentiable and also derive a differential equation for this function. Although we have not succeeded in using this equation to improve on bounds on the optimal limiting value, we argue that it has this potential.

The standard Markov chain Monte Carlo method of estimating an expected value is to generate a Markov chain which converges to the target distribution and then compute correlated sample averages. In many applications the quantity of interest θ is represented as a product of expected values, θ = µ1 ⋯ µk, and a natural estimator is a product of averages. To increase the confidence level, we can compute a median of independent runs. The goal of this paper is to analyze such an estimator , i.e. an estimator which is a ‘median of products of averages’ (MPA). Sufficient conditions are given for to have fixed relative precision at a given level of confidence, that is, to satisfy . Our main tool is a new bound on the mean-square error, valid also for nonreversible Markov chains on a finite state space.

The waste-recycling Monte Carlo (WRMC) algorithm introduced by physicists is a modification of the (multi-proposal) Metropolis–Hastings algorithm, which makes use of all the proposals in the empirical mean, whereas the standard (multi-proposal) Metropolis–Hastings algorithm uses only the accepted proposals. In this paper we extend the WRMC algorithm to a general control variate technique and exhibit the optimal choice of the control variate in terms of the asymptotic variance. We also give an example which shows that, in contradiction to the intuition of physicists, the WRMC algorithm can have an asymptotic variance larger than that of the Metropolis–Hastings algorithm. However, in the particular case of the Metropolis–Hastings algorithm called the Boltzmann algorithm, we prove that the WRMC algorithm is asymptotically better than the Metropolis–Hastings algorithm. This last property is also true for the multi-proposal Metropolis–Hastings algorithm. In this last framework we consider a linear parametric generalization of WRMC, and we propose an estimator of the explicit optimal parameter using the proposals.

We consider a safety system represented by a monotone (coherent) structure function of n components. The state of the components and the system is only revealed through inspection, which is carried out at intervals of length T. If the inspection shows that the system is in a critical state or has failed, it is overhauled and all components are restored to a good-as-new condition. Costs are associated with tests, system downtime, and repairs. The problem is to find an optimal T minimizing the expected long-run cost per unit of time. The purpose of this paper is to present a formal set-up for this problem and to show how an optimal T can be determined. A special case where the components have three states is given particular attention. It corresponds to a ‘delay time type system’, where the presence of a fault in a component does not lead to an immediate failure—there will be a ‘delay time’ between the occurrence of the fault and the failure of the component.

We consider the problem of allocating k active spares to n components of a series system in order to optimize its lifetime. Under the hypotheses that lifetimes of n components are identically distributed with distribution function F(⋅), lifetimes of k spares are identically distributed with distribution function G(⋅), lifetimes of components and spares are independently distributed, and that ln(G(x))/ln(F(x)) is increasing in x, we show that the strategy of balanced allocation of spares optimizes the failure rate function of the system. Furthermore, under the hypotheses that lifetimes of n components are stochastically ordered, lifetimes of k spares are identically distributed, and that lifetimes of components and spares are independently distributed, we show that the strategy of balanced allocation of spares is superior to the strategy of allocating a larger number of components to stronger components. For coherent systems consisting of n identical components with n identical redundant (spare) components, we compare strategies of component and system redundancies under the criteria of reversed failure rate and likelihood ratio orderings. When spares and original components do not necessarily match in their life distributions, we provide a sufficient condition, on the structure of the coherent system, for the strategy of component redundancy to be superior to the strategy of system redundancy under reversed failure rate ordering. As a consequence, we show that, for r-out-of-n systems, the strategy of component redundancy is superior to the strategy of system redundancy under the criterion of reversed failure rate ordering. When spares and original components match in their life distributions, we provide a necessary and sufficient condition, on the structure of the coherent system, for the strategy of component redundancy to be superior to the strategy of system redundancy under the likelihood ratio ordering. As a consequence, we show that, for r-out-of-n systems, with spares and original components matching in their life distributions, the strategy of component redundancy is superior to the strategy of system redundancy under the likelihood ratio ordering.

This note explores the behaviour of the implied volatility of a European call option far from maturity. Asymptotic formulae are derived with precise control over the error terms. The connection between the asymptotic implied volatility and the cumulant generating function of the logarithm of the underlying stock price is discussed in detail and illustrated by examples.

Geometric convergence to 0 of the probability that the goal has not been encountered by the nth generation is established for a class of genetic algorithms. These algorithms employ a quickly decreasing mutation rate and a crossover which restarts the algorithm in a controlled way depending on the current population and restricts execution of this crossover to occasions when progress of the algorithm is too slow. It is shown that without the crossover studied here, which amounts to a tempered restart of the algorithm, the asserted geometric convergence need not hold.

A gambler with an initial bankroll is faced with a finite sequence of identical and independent bets. For each bet, he may wager up to his current bankroll, and will win this amount with probability p or lose it with probability 1-p. His problem is to devise a wagering strategy that will maximize his final expected utility with the side condition that the total amount wagered (i.e. the total ‘action’) be at least his initial bankroll. Our main result is an expression that characterizes when the strategy of placing equal-sized wagers on all bets is optimal. In particular, for a given bankroll B, utility function f (concave, increasing, differentiable), and n bets, we show that it is optimal to wager b/n on each bet if and only if the probability of winning each bet is less than or equal to some value p⋆∈[½,1] (where p⋆ is an explicit function of B, f, and n). We prove the result by using a basic nonlinear programming technique.

A parallel system with heterogeneous exponential component lifetimes is shown to be more skewed (according to the convex transform order) than the system with independent and identically distributed exponential components. As a consequence, equivalent conditions for comparing the variabilities of the largest order statistics from heterogeneous and homogeneous exponential samples in the sense of the dispersive order and the right-spread order are established. A sufficient condition is also given for the proportional hazard rate model.

The trading strategy of ‘buy-and-hold for superior stock and sell-at-once for inferior stock’, as suggested by conventional wisdom, has long been prevalent in Wall Street. In this paper, two rationales are provided to support this trading strategy from a purely mathematical standpoint. Adopting the standard binomial tree model (or CRR model for short, as first introduced in Cox, Ross and Rubinstein (1979)) to model the stock price dynamics, we look for the optimal stock selling rule(s) so as to maximize (i) the chance that an investor can sell a stock precisely at its ultimate highest price over a fixed investment horizon [0,T]; and (ii) the expected ratio of the selling price of a stock to its ultimate highest price over [0,T]. We show that both problems have exactly the same optimal solution which can literally be interpreted as ‘buy-and-hold or sell-at-once’ depending on the value of p (the going-up probability of the stock price at each step): when p›½, selling the stock at the last time step N is the optimal selling strategy; when p=½, a selling time is optimal if the stock is sold either at the last time step or at the time step when the stock price reaches its running maximum price; and when p‹½, time 0, i.e. selling the stock at once, is the unique optimal selling time.

The general stochastic SIR epidemic in a closed population under the influence of a term-time forced environment is considered. An ‘environment’ in this context is any external factor that influences the contact rate between individuals in the population, but is itself unaffected by the population. Here ‘term-time forcing’ refers to discontinuous but cyclic changes in the contact rate. The inclusion of such an environment into the model is done by replacing a single contact rate λ with a cyclically alternating renewal process with k different states denoted {Λ(t)}t≥0. Threshold conditions in terms of R⋆ are obtained, such that R⋆>1 implies that π, the probability of a large outbreak, is strictly positive. Examples are given where π is evaluated numerically from which the impact of the distribution of the time periods that Λ(t) spends in its different states is clearly seen.

In extreme shock models, only the impact of the current, possibly fatal shock is usually taken into account, whereas in cumulative shock models, the impact of the preceding shocks is accumulated as well. In this paper we combine an extreme shock model with a specific cumulative shock model. It is shown that the proposed setting can also be interpreted as a generalization of the well-known Brown–Proschan model that describes repair actions for repairable systems. For a system subject to a specific process of shocks, we derive the survival probability and the corresponding failure rate function. Some meaningful interpretations and examples are discussed.

We propose a new approach to utilities in (state) complete markets that is consistent with state-dependent utilities. Full solutions of the optimal consumption and portfolio problem are obtained in a very general setting which includes several functional forms for utilities used in the current literature, and consider general restrictions on allowable wealths. As a secondary result, we obtain a suitable representation for straightforward numerical computations of the optimal consumption and investment strategies. In our model, utilities reflect the level of consumption satisfaction of flows of cash in future times as they are (uniquely) valued by the market when the economic agents are making their consumption and investment decisions. The theoretical framework used for the model is the one proposed in Londoño (2008). We develop the martingale methodology for the solution of the problem of optimal consumption and investment in this setting.

The goal of this paper is to provide formulae for the expectation and variance of the height and length of the ancestral recombination graph (ARG). While the formula for the expectation of the height is known (see, e.g. Krone and Neuhauser (1997)), the other formulae seem to be new. We obtain in particular (see Theorem 4.1) a very simple formula which expresses the expectation of the length of the ARG as a linear combination of the expectations of both the length of the coalescent tree and the height of the ARG. Finally, we study the speed at which the ARG comes down from infinity.

We study defaultable bond prices in the Black–Cox model with jumps in the asset value. The jump-size distribution is arbitrary, and following Longstaff and Schwartz (1995) and Zhou (2001) we assume that, if default occurs, the recovery at maturity depends on the ‘severity of default’. Under this general setting, the vehicle for our analysis is an integral equation. With the aid of this, we prove some properties of the bond price which are consistent numerically and empirically with earlier works. In particular, the limiting credit spread as time to maturity tends to 0 is nonzero. As a byproduct, we show that the integral equation implies an infinite-series expansion for the bond price.

In this paper we are concerned with the equilibrium distribution ∏n of the nth element in a sequence of continuous-time density-dependent Markov processes on the integers. Under a (2+α)th moment condition on the jump distributions, we establish a bound of order O(n-(α+1)/2√logn) on the difference between the point probabilities of ∏n and those of a translated Poisson distribution with the same variance. Except for the factor √logn, the result is as good as could be obtained in the simpler setting of sums of independent, integer-valued random variables. Our arguments are based on the Stein-Chen method and coupling.

We introduce a class of discrete-time two-sex branching processes where the offspring probability distribution and the mating function are governed by an environmental process. It is assumed that the environmental process is formed by independent but not necessarily identically distributed random vectors. For such a class, we determine some relationships among the probability generating functions involved in the mathematical model and derive expressions for the main moments. Also, by considering different probabilistic approaches we establish several results concerning the extinction probability. A simulated example is presented as an illustration.

In this paper we generalize existing results for the steady-state distribution of growth-collapse processes. We begin with a stationary setup with some relatively general growth process and observe that, under certain expected conditions, point- and time-stationary versions of the processes exist as well as a limiting distribution for these processes which is independent of initial conditions and necessarily has the marginal distribution of the stationary version. We then specialize to the cases where an independent and identically distributed (i.i.d.) structure holds and where the growth process is a nondecreasing Lévy process, and in particular linear, and the times between collapses form an i.i.d. sequence. Known results can be seen as special cases, for example, when the inter-collapse times form a Poisson process or when the collapse ratio is deterministic. Finally, we comment on the relation between these processes and shot-noise type processes, and observe that, under certain conditions, the steady-state distribution of one may be directly inferred from the other.