Mathematical Finance Research Half Day

Utrecht University's Mathematical Institute welcomes you to a half day research seminar focusing on Mathematical Finance. Specialists Laura Spierdijk, Yilong Xu, Jaehyuk Choi, and Michael Sanders will present fascinating new research relating to mathematical modeling, derivatives, markets and bonds. Please read on for the abstracts.

Everyone is welcome to attend from 08:30 for coffee and networking. There is also a chance to network during the break. Refreshments will be provided.

UPDATE: Due to the number of registrations, we have a NEW LOCATION:

Marinus Ruppert Building, Room Ruppert A, Science Park Utrecht University, Leuvenlaan 21, 3584 CE Utrecht

The event is free to attend, but please do register.

Alternatively, we have arranged for the event to be live streamed, the details are below. It is not necessary to register if you are attending online.

Hedging the Unhedgeable? Pricing CAT Bonds in a Changing Climate

9:00- 9:50: Laura Spierdijk (University of Twente)

As climate change intensifies, extreme weather events pose growing risks to insurers and policyholders. Catastrophe (CAT) bonds offer a mechanism to transfer these risks to capital markets, but pricing them presents significant mathematical and economic challenges. The payout structure of CAT bonds is driven by natural disaster events, whose underlying probability distributions are difficult to estimate due to limited historical data, model uncertainty, and non-stationary climate dynamics. Moreover, because catastrophe risks are largely unhedgeable and insurance markets are incomplete, standard risk-neutral pricing techniques face fundamental limitations. In this talk, I will introduce the structure of CAT bonds, explain their role in managing extreme weather risks, and examine the challenges involved in pricing them. I will outline a widely used no-arbitrage approach to CAT bond valuation, emphasizing its key assumptions. Finally, I will critically assess these assumptions in the context of growing climate uncertainty and explore alternative pricing methods along with the assumptions they entail.

A "Green Premium" or a "Brown Discount": Evidence from Experimental Asset Markets

9:55-10:45: Yilong Xu (Utrecht University)

Sustainability preference is often measured at the individual level. However, it is questionable whether individual sustainability preferences can manifest in a competitive asset market setting, whether they influence asset prices, and whether investors seek to generate social impact through investments. To address these issues, we conduct a series of experiments, measuring sustainability preference at both the individual and market levels. In our market experiments, investors may accept lower payoffs for assets that yield positive externalities (green) compared to those with neutral (grey) or negative (brown) externalities. We observe a dual pattern: while green assets are hardly over-priced, investors consistently demonstrate an aversion to brown assets, leading to significant underpricing --- a “Brown Discount.” When we eliminate speculative incentives through a 100% capital gains tax, even the minimal overpricing of green assets disappears, suggesting that any observed green premium is driven by speculative motives rather than pure sustainability preference.

Efficient simulation of the SABR model

11:15-12:05: Jaehyuk Choi (Columbia University)

We propose an efficient and reliable simulation scheme for the stochastic-alpha-beta-rho (SABR) model. The two challenges of the SABR simulation lie in sampling (i) the integrated variance conditional on terminal volatility and (ii) the terminal price conditional on terminal volatility and integrated variance. For the first sampling procedure, we analytically derive the first four moments of the conditional average variance, and sample it from the moment-matched shifted lognormal approximation. For the second sampling procedure, we approximate the conditional terminal price as a constant-elasticity-of-variance (CEV) distribution. Our CEV approximation preserves the martingale condition and precludes arbitrage, which is a key advantage over Islah's approximation used in most SABR simulation schemes in the literature. Then, we adopt the exact sampling method of the CEV distribution based on the shifted-Poisson-mixture Gamma random variable. Our enhanced procedures avoid the tedious Laplace inversion algorithm for sampling integrated variance and non-efficient inverse transform sampling of the forward price in some of the earlier simulation schemes. Numerical results demonstrate our simulation scheme to be highly efficient, accurate, and reliable. (This work is in collaboration with Lilian Hu and Yue Kuen Kwok. The paper is available at https://arxiv.org/abs/2408.01898)

Execution of financial products: how quantitative analysis drives decision making in Private Debt and Derivatives

12:10-13:00: Michael Sanders (Rabobank)

In this talk, Michael Sanders (Rabobank) will highlight how market demands shape the creation and execution of modern financial products, including private debt, derivatives, and Dutch mortgages.

Topics include pricing, pipeline and amortization risk, and an introduction to direct lending. The presentation also underscores the mathematical foundations critical to product design and risk management, offering insights for students and professionals interested in the intersection of finance and quantitative analysis.