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2018 | Book

Introduction Read chapter Read first chapter

Control Engineering and Finance

Author: Dr. Selim S. Hacısalihzade

Publisher: Springer International Publishing

Book Series : Lecture Notes in Control and Information Sciences

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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About this book

This book includes a review of mathematical tools like modelling, analysis of stochastic processes, calculus of variations and stochastic differential equations which are applied to solve financial problems like modern portfolio theory and option pricing. Every chapter presents exercises which help the reader to deepen his understanding. The target audience comprises research experts in the field of finance engineering, but the book may also be beneficial for graduate students alike.

Table of Contents

Frontmatter
Chapter 1. Introduction
Abstract
At first glance, the disciplines of finance and control engineering may look as unrelated as any two disciplines could be. However, this is true only to the uninitiated observer. For trained control engineers, the similarities of the underlying problems are striking. One, if not the main, intent of control engineering is to control a process in such a way that it behaves in the desired manner in spite of unforeseen disturbances acting upon it. Finance, on the other hand, is the study of the management of funds with the objective of increasing them, in spite of unexpected economical and political events. Once formulated this way, the similarity of control engineering to finance becomes obvious.
Selim S. Hacιsalihzade
Chapter 2. Modeling and Identification
Abstract
Most control engineering exercises begin with the phrase “Given is the system with the transfer function ...”. Alas, in engineering practice, a mathematical description of the plant which is to be controlled is seldom available. The plant first needs to be modeled mathematically. In spite of this fact, control engineering courses generally do not spend much time on modeling. Perhaps this is because modeling can be said to be more of an art than a science. This Chapter begins by defining what is meant by the words model and modeling. It then illustrates various types of models, studies the process of modeling and concludes with the problem of parameter identification and related optimization techniques.
Selim S. Hacιsalihzade
Chapter 3. Probability and Stochastic Processes
Abstract
This Chapter builds on Kolmogorov’s axioms and reviews basic concepts of probability theory. Mathematical description and analysis of stochastic processes with emphasis on several relevant special classes like stationary and ergodic processes are explained. Some special processes such as the normal process, the Wiener process, the Markov process and white noise are then discussed.
Selim S. Hacιsalihzade
Chapter 4. Optimal Control
Abstract
Optimal Control is a very important and broad branch of control engineering. Clearly, no single chapter can possibly claim to cover all of this field. Therefore, this Chapter, which is intended solely as an introduction or a refresher, begins with calculus of variations, goes through the fixed and variable endpoint problems as well as the variation problem with constraints. These results are then applied to dynamic systems, leading to the solution of the optimal control problem using the Hamilton-Jacobi and Pontryagin methods. The concept of dynamic programming is explained and the chapter ends with a brief introduction to differential games.
Selim S. Hacιsalihzade
Chapter 5. Stochastic Analysis
Abstract
This chapter begins by studying white noise closely and by introducing the concept of stochastic differential equations (SDE). Different ways of solving such equations are then discussed. Stochastic integration and Itô integrals are shown together with Itô’s lemma for scalar and vector processes. Various stochastic models used in financial applications are illustrated. The connection between deterministic partial differential equations and SDE’s is indicated. The chapter aims to give just a taste of stochastic calculus/stochastic control and whet the appetite for this broad field. The reader is referred to standard books of reference for an in depth study of the subject matter.
Selim S. Hacιsalihzade
Chapter 6. Financial Markets and Instruments
Abstract
The Chapter begins by introducing the concept of time value of money, fixed income instruments like savings accounts, certificates of deposit and bonds. It then moves on to cover a number of topics, from common stocks to various types of funds like common stock funds, balanced funds and exchange traded funds. Commodities, real estate and some other instruments for investing are mentioned. Fundamental concepts relating to risk, return and utility are also reviewed in this Chapter. Finally, the role and importance of the banks in economies are presented.
Selim S. Hacιsalihzade
Chapter 7. Bonds
Abstract
This Chapter defines various parameters of bonds like coupon, maturity, par value, ownership type and indentures. Types of bonds differentiated by the type of collateral behind the issue are introduced. Bond returns and valuations are derived heuristically based on the return concept defined in the previous Chapter. Fundamental determinants of interest rates and bond yields, together with the Macaulay duration are discussed with examples. The yield curve is presented together with its implications for the economy.
Selim S. Hacιsalihzade
Chapter 8. Portfolio Management
Abstract
This Chapter first looks at an approach for methodically diversifying among different assets, the so-called Modern Portfolio Theory (MPT), as applied to equity stocks. Empirical studies with examples from Swiss, Turkish and American stock markets are presented. Smart algorithms for managing stock portfolios based on these empirical studies are proposed. Management of bond portfolios using the Vašíček model and static bond portfolio management methods finish off this chapter.
Selim S. Hacιsalihzade
Chapter 9. Derivatives and Structured Financial Instruments
Abstract
This Chapter reviews forward contracts, futures and margin accounts. Options are then discussed in detail. Black-Scholes equation is derived and the calculation of option prices using this equation is shown for European and American options. Some popular structured products including swaps and how they might be used to enhance returns or reduce risks of diversified investment portfolios are discussed.
Selim S. Hacιsalihzade
Backmatter
Metadata
Title
Control Engineering and Finance
Author
Dr. Selim S. Hacısalihzade
Copyright Year
2018
Electronic ISBN
978-3-319-64492-9
Print ISBN
978-3-319-64491-2
DOI
https://doi.org/10.1007/978-3-319-64492-9

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