The purpose of this book is to present a comprehensive account of the different definitions of stochastic integration for fBm, and to give applications of the resulting theory. Particular emphasis is placed on studying the relations between the different approaches. Readers are assumed to be familiar with probability theory and stochastic analysis, although the mathematical techniques used in the book are thoroughly exposed and some of the necessary prerequisites, such as classical white noise theory and fractional calculus, are recalled in the appendices. This book will be a valuable reference for graduate students and researchers in mathematics, biology, meteorology, physics, engineering and finance.

Kiyosi Ito, the founder of stochastic calculus, is one of the few central figures of the twentieth century mathematics who reshaped the mathematical world. Today stochastic calculus is a central research field with applications in several other mathematical disciplines, for example physics, engineering, biology, economics and finance.

The Abel Symposium 2005 was organized as a tribute to the work of Kiyosi Ito on the occasion of his 90th birthday. Distinguished researchers from all over the world were invited to present the newest developments within the exciting and fast growing field of stochastic analysis. The present volume combines both papers from the invited speakers and contributions by the presenting lecturers.

A special feature is the Memoirs that Kiyoshi Ito wrote for this occasion. These are valuable pages for both young and established researchers in the field.

This book is based on research that, to a large extent, started around 1990, when a research project on fluid flow in stochastic reservoirs was initiated by a group including some of us with the support of VISTA, a research coopera tion between the Norwegian Academy of Science and Letters and Den norske stats oljeselskap A.S. (Statoil). The purpose of the project was to use stochastic partial differential equations (SPDEs) to describe the flow of fluid in a medium where some of the parameters, e.g., the permeability, were stochastic or "noisy." We soon realized that the theory of SPDEs at the time was insufficient to handle such equations. Therefore it became our aim to develop a new mathematically rigorous theory that satisfied the following conditions. 1) The theory should be physically meaningful and realistic, and the corre sponding solutions should make sense physically and should be useful in applications. 2) The theory should be general enough to handle many of the interesting SPDEs that occur in reservoir theory and related areas. 3) The theory should be strong and efficient enough to allow us to solve th, se SPDEs explicitly, or at least provide algorithms or approximations for the solutions."

Hardbound. This book is a result of recent developments in several fields. Mathematicians, statisticians, finance theorists, and economists found several interconnections in their research. The emphasis was on common methods, although the applications were also interrelated.The main topic is dynamic stochastic models, in which information arrives and decisions are made sequentially. This gives rise to what finance theorists call option value, what some economists label quasi-option value. Some papers extend the mathematical theory, some deal with new methods of economic analysis, while some present important applications, to natural resources in particular.

This book presents innovations in the mathematical foundations of financial analysis and numerical methods for finance and applications to the modeling of risk. The topics selected include measures of risk, credit contagion, insider trading, information in finance, stochastic control and its applications to portfolio choices and liquidation, models of liquidity, pricing, and hedging. The models presented are based on the use of Brownian motion, Levy processes and jump diffusions. Moreover, fractional Brownian motion and ambit processes are also introduced at various levels. The chosen blend of topics gives an overview of the frontiers of mathematics for finance. New results, new methods and new models are all introduced in different forms according to the subject. Additionally, the existing literature on the topic is reviewed. The diversity of the topics makes the book suitable for graduate students, researchers and practitioners in the areas of financial modeling and quantitative finance. The chapters will also be of interest to experts in the financial market interested in new methods and products. This volume presents the results of the European ESF research networking program Advanced Mathematical Methods for Finance.

This volume contains the contributions of the participants of the Sixth Oslo-Silivri Workshop on Stochastic Analysis, held in Geilo from July 29 to August 6, 1996. There are two main lectures * Stochastic Differential Equations with Memory, by S.E. A. Mohammed, * Backward SDE's and Viscosity Solutions of Second Order Semilinear PDE's, by E. Pardoux. The main lectures are presented at the beginning of the volume. There is also a review paper at the third place about the stochastic calculus of variations on Lie groups. The contributing papers vary from SPDEs to Non-Kolmogorov type probabilistic models. We would like to thank * VISTA, a research cooperation between Norwegian Academy of Sciences and Letters and Den Norske Stats Oljeselskap (Statoil), * CNRS, Centre National de la Recherche Scientifique, * The Department of Mathematics of the University of Oslo, * The Ecole Nationale Superieure des Telecommunications, for their financial support. L. Decreusefond J. Gjerde B. 0ksendal A.S. Ustunel PARTICIPANTS TO THE 6TH WORKSHOP ON STOCHASTIC ANALYSIS Vestlia H yfjellshotell, Geilo, Norway, July 28 -August 4, 1996. E-mail: [email protected] Aureli ALABERT Departament de Matematiques Laurent DECREUSEFOND Universitat Autonoma de Barcelona Ecole Nationale Superieure des Telecom- 08193-Bellaterra munications CATALONIA (Spain) Departement Reseaux E-mail: alabert@mat. uab.es 46, rue Barrault Halvard ARNTZEN 75634 Paris Cedex 13 Dept. of Mathematics FRANCE University of Oslo E-mail: [email protected] Box 1053 Blindern Laurent DENIS N-0316 Oslo C.M.I.

One of the most challenging subjects of stochastic analysis in relation to physics is the analysis of heat kernels on infinite dimensional manifolds. The simplest nontrivial case is that of thepath and loop space on a Lie group. In this volume an up-to-date survey of the topic is given by Leonard Gross, a prominent developer of the theory. Another concise but complete survey of Hausdorff measures on Wiener space and its applications to Malliavin Calculus is given by D. Feyel, one of the most active specialists in this area. Other survey articles deal with short-time asymptotics of diffusion pro cesses with values in infinite dimensional manifolds and large deviations of diffusions with discontinuous drifts. A thorough survey is given of stochas tic integration with respect to the fractional Brownian motion, as well as Stokes' formula for the Brownian sheet, and a new version of the log Sobolev inequality on the Wiener space. Professional mathematicians looking for an overview of the state-of-the art in the above subjects will find this book helpful. In addition, graduate students as well as researchers whose domain requires stochastic analysis will find the original results of interest for their own research. The organizers acknowledge gratefully the financial help ofthe University of Oslo, and the invaluable aid of Professor Bernt 0ksendal and l'Ecole Nationale Superieure des Telecommunications."

Here is a rigorous introduction to the most important and useful solution methods of various types of stochastic control problems for jump diffusions and its applications. Discussion includes the dynamic programming method and the maximum principle method, and their relationship. The text emphasises real-world applications, primarily in finance. Results are illustrated by examples, with end-of-chapter exercises including complete solutions. The 2nd edition adds a chapter on optimal control of stochastic partial differential equations driven by Levy processes, and a new section on optimal stopping with delayed information. Basic knowledge of stochastic analysis, measure theory and partial differential equations is assumed.

This book presents innovations in the mathematical foundations of financial analysis and numerical methods for finance and applications to the modeling of risk. The topics selected include measures of risk, credit contagion, insider trading, information in finance, stochastic control and its applications to portfolio choices and liquidation, models of liquidity, pricing, and hedging. The models presented are based on the use of Brownian motion, Levy processes and jump diffusions. Moreover, fractional Brownian motion and ambit processes are also introduced at various levels. The chosen blend of topics gives an overview of the frontiers of mathematics for finance. New results, new methods and new models are all introduced in different forms according to the subject. Additionally, the existing literature on the topic is reviewed. The diversity of the topics makes the book suitable for graduate students, researchers and practitioners in the areas of financial modeling and quantitative finance. The chapters will also be of interest to experts in the financial market interested in new methods and products. This volume presents the results of the European ESF research networking program Advanced Mathematical Methods for Finance.

One of the most challenging subjects of stochastic analysis in relation to physics is the analysis of heat kernels on infinite dimensional manifolds. The simplest nontrivial case is that of thepath and loop space on a Lie group. In this volume an up-to-date survey of the topic is given by Leonard Gross, a prominent developer of the theory. Another concise but complete survey of Hausdorff measures on Wiener space and its applications to Malliavin Calculus is given by D. Feyel, one of the most active specialists in this area. Other survey articles deal with short-time asymptotics of diffusion pro cesses with values in infinite dimensional manifolds and large deviations of diffusions with discontinuous drifts. A thorough survey is given of stochas tic integration with respect to the fractional Brownian motion, as well as Stokes' formula for the Brownian sheet, and a new version of the log Sobolev inequality on the Wiener space. Professional mathematicians looking for an overview of the state-of-the art in the above subjects will find this book helpful. In addition, graduate students as well as researchers whose domain requires stochastic analysis will find the original results of interest for their own research. The organizers acknowledge gratefully the financial help ofthe University of Oslo, and the invaluable aid of Professor Bernt 0ksendal and l'Ecole Nationale Superieure des Telecommunications.

This volume contains the contributions of the participants of the Sixth Oslo-Silivri Workshop on Stochastic Analysis, held in Geilo from July 29 to August 6, 1996. There are two main lectures * Stochastic Differential Equations with Memory, by S.E. A. Mohammed, * Backward SDE's and Viscosity Solutions of Second Order Semilinear PDE's, by E. Pardoux. The main lectures are presented at the beginning of the volume. There is also a review paper at the third place about the stochastic calculus of variations on Lie groups. The contributing papers vary from SPDEs to Non-Kolmogorov type probabilistic models. We would like to thank * VISTA, a research cooperation between Norwegian Academy of Sciences and Letters and Den Norske Stats Oljeselskap (Statoil), * CNRS, Centre National de la Recherche Scientifique, * The Department of Mathematics of the University of Oslo, * The Ecole Nationale Superieure des Telecommunications, for their financial support. L. Decreusefond J. Gjerde B. 0ksendal A.S. Ustunel PARTICIPANTS TO THE 6TH WORKSHOP ON STOCHASTIC ANALYSIS Vestlia H yfjellshotell, Geilo, Norway, July 28 -August 4, 1996. E-mail: [email protected] Aureli ALABERT Departament de Matematiques Laurent DECREUSEFOND Universitat Autonoma de Barcelona Ecole Nationale Superieure des Telecom- 08193-Bellaterra munications CATALONIA (Spain) Departement Reseaux E-mail: alabert@mat. uab.es 46, rue Barrault Halvard ARNTZEN 75634 Paris Cedex 13 Dept. of Mathematics FRANCE University of Oslo E-mail: [email protected] Box 1053 Blindern Laurent DENIS N-0316 Oslo C.M.I.

This book is based on research that, to a large extent, started around 1990, when a research project on fluid flow in stochastic reservoirs was initiated by a group including some of us with the support of VISTA, a research coopera tion between the Norwegian Academy of Science and Letters and Den norske stats oljeselskap A.S. (Statoil). The purpose of the project was to use stochastic partial differential equations (SPDEs) to describe the flow of fluid in a medium where some of the parameters, e.g., the permeability, were stochastic or "noisy." We soon realized that the theory of SPDEs at the time was insufficient to handle such equations. Therefore it became our aim to develop a new mathematically rigorous theory that satisfied the following conditions. 1) The theory should be physically meaningful and realistic, and the corre sponding solutions should make sense physically and should be useful in applications. 2) The theory should be general enough to handle many of the interesting SPDEs that occur in reservoir theory and related areas. 3) The theory should be strong and efficient enough to allow us to solve th, se SPDEs explicitly, or at least provide algorithms or approximations for the solutions."

The purpose of this book is to present a comprehensive account of the different definitions of stochastic integration for fBm, and to give applications of the resulting theory. Particular emphasis is placed on studying the relations between the different approaches. Readers are assumed to be familiar with probability theory and stochastic analysis, although the mathematical techniques used in the book are thoroughly exposed and some of the necessary prerequisites, such as classical white noise theory and fractional calculus, are recalled in the appendices. This book will be a valuable reference for graduate students and researchers in mathematics, biology, meteorology, physics, engineering and finance.

The first edition of Stochastic Partial Differential Equations: A Modeling, White Noise Functional Approach, gave a comprehensive introduction to SPDEs. In this, the second edition, the authors build on the theory of SPDEs driven by space-time Brownian motion, or more generally, space-time L vy process noise. Applications of the theory are emphasized throughout. The stochastic pressure equation for fluid flow in porous media is treated, as are applications to finance.

Graduate students in pure and applied mathematics as well as researchers in SPDEs, physics, and engineering will find this introduction indispensible. Useful exercises are collected at the end of each chapter.

There are already several excellent books on Malliavin calculus. However, most of them deal only with the theory of Malliavin calculus for Brownian motion, with [35] as an honorable exception. Moreover, most of them discuss only the applicationto regularityresults for solutions ofSDEs, as this wasthe original motivation when Paul Malliavin introduced the in?nite-dimensional calculus in 1978 in [158]. In the recent years, Malliavin calculus has found many applications in stochastic control and within ?nance. At the same time, L' evy processes have become important in ?nancial modeling. In view of this, we have seen the need for a book that deals with Malliavin calculus for L' evy processesin general,not just Brownianmotion, and that presentssome of the most important and recent applications to ?nance. It is the purpose of this book to try to ?ll this need. In this monograph we present a general Malliavin calculus for L' evy processes, covering both the Brownianmotioncaseand the purejump martingalecasevia Poissonrandom measures,and also some combination of the two.

An introduction to the basic theory of stochastic calculus and its applications. Examples are given throughout the text, in order to motivate and illustrate the theory and show its importance for many applications in e.g. economics, biology and physics. The basic idea of the presentation is to start from some basic results (without proofs) of the easier cases and develop the theory from there, and to concentrate on the proofs of the easier case in order to quickly progress to the parts of the theory that are most important for the applications. For the 6th edition the author has added further exercises and, for the first time, solutions to many of the exercises are provided.

Here is a rigorous introduction to the most important and useful solution methods of various types of stochastic control problems for jump diffusions and its applications. Discussion includes the dynamic programming method and the maximum principle method, and their relationship. The text emphasises real-world applications, primarily in finance. Results are illustrated by examples, with end-of-chapter exercises including complete solutions. The 2nd edition adds a chapter on optimal control of stochastic partial differential equations driven by Levy processes, and a new section on optimal stopping with delayed information. Basic knowledge of stochastic analysis, measure theory and partial differential equations is assumed."