Optimal hedging of Derivatives with transaction costs

We investigate the optimal strategy over a finite time horizon for a portfolio of stock and bond and a derivative in an multiplicative Markovian market model with transaction costs (friction). The optimization problem is solved by a Hamilton-Bellman-Jacobi equation, which by the verification theorem has well-behaved solutions if certain conditions on a potential are satisfied. In the case at hand, these conditions simply imply arbitrage-free ("Black-Scholes") pricing of the derivative. While pricing is hence not changed by friction allow a portfolio to fluctuate around a delta hedge. In the limit of weak friction, we determine the optimal control to essentially be of two parts: a strong control, which tries to bring the stock-and-derivative portfolio towards a Black-Scholes delta hedge; and a weak control, which moves the portfolio by adding or subtracting a Black-Scholes hedge. For simplicity we assume growth-optimal investment criteria and quadratic friction.Comment: Revised version, expanded introduction and references 17 pages, submitted to International Journal of Theoretical and Applied Finance (IJTAF

Behavior of heuristics and state space structure near SAT/UNSAT transition

We study the behavior of ASAT, a heuristic for solving satisfiability problems by stochastic local search near the SAT/UNSAT transition. The heuristic is focused, i.e. only variables in unsatisfied clauses are updated in each step, and is significantly simpler, while similar to, walksat or Focused Metropolis Search. We show that ASAT solves instances as large as one million variables in linear time, on average, up to 4.21 clauses per variable for random 3SAT. For K higher than 3, ASAT appears to solve instances at the ``FRSB threshold'' in linear time, up to K=7.Comment: 12 pages, 6 figures, longer version available as MSc thesis of first author at http://biophys.physics.kth.se/docs/ardelius_thesis.pd

Cooperative action in eukaryotic gene regulation: physical properties of a viral example

The Epstein-Barr virus (EBV) infects more than 90% of the human population, and is the cause of several both serious and mild diseases. It is a tumorivirus, and has been widely studied as a model system for gene (de)regulation in human. A central feature of the EBV life cycle is its ability to persist in human B cells in states denoted latency I, II and III. In latency III the host cell is driven to cell proliferation and hence expansion of the viral population, but does not enter the lytic pathway, and no new virions are produced, while the latency I state is almost completely dormant. In this paper we study a physico-chemical model of the switch between latency I and latency III in EBV. We show that the unusually large number of binding sites of two competing transcription factors, one viral and one from the host, serves to make the switch sharper (higher Hill coefficient), either by cooperative binding between molecules of the same species when they bind, or by competition between the two species if there is sufficient steric hindrance.Comment: 7 pages, 6 figures, 1 tabl

Random pure Gaussian states and Hawking radiation

A black hole evaporates by Hawking radiation. Each mode of that radiation is thermal. If the total state is nevertheless to be pure, modes must be entangled. Estimating the minimum size of this entanglement has been an important outstanding issue. We develop a new theory of constrained random symplectic transformations, based on that the total state is pure and Gaussian with given marginals. In the random constrained symplectic model we then compute the distribution of mode-mode correlations, from which we bound mode-mode entanglement. Modes of frequency much larger than $\frac{k_B T_{H}(t)}{\hbar}$ are not populated at time $t$ and drop out of the analysis. Among the other modes find that correlations and hence entanglement between relatively thinly populated modes (early-time high-frequency modes and/or late modes of any frequency) to be strongly suppressed. Relatively highly populated modes (early-time low-frequency modes) can on the other hand be strongly correlated, but a detailed analysis reveals that they are nevertheless also weakly entangled. Our analysis hence establishes that restoring unitarity after a complete evaporation of a black hole does not require strong quantum entanglement between any pair of Hawking modes. Our analysis further gives exact general expressions for the distribution of mode-mode correlations in random, pure, Gaussian states with given marginals, which may have applications beyond black hole physics.Comment: Revised version, with supplementary material. Main paper 6 pages, 3 figures. Supplementary material 29 pages, 1 figur

Experimental evidence of chaotic advection in a convective flow

Lagrangian chaos is experimentally investigated in a convective flow by means of Particle Tracking Velocimetry. The Fnite Size Lyapunov Exponent analysis is applied to quantify dispersion properties at different scales. In the range of parameters of the experiment, Lagrangian motion is found to be chaotic. Moreover, the Lyapunov depends on the Rayleigh number as ${\cal R}a^{1/2}$. A simple dimensional argument for explaining the observed power law scaling is proposed.Comment: 7 pages, 3 figur

On the relationship between directed percolation and the synchronization transition in spatially extended systems

We study the nature of the synchronization transition in spatially extended systems by discussing a simple stochastic model. An analytic argument is put forward showing that, in the limit of discontinuous processes, the transition belongs to the directed percolation (DP) universality class. The analysis is complemented by a detailed investigation of the dependence of the first passage time for the amplitude of the difference field on the adopted threshold. We find the existence of a critical threshold separating the regime controlled by linear mechanisms from that controlled by collective phenomena. As a result of this analysis we conclude that the synchronization transition belongs to the DP class also in continuous models. The conclusions are supported by numerical checks on coupled map lattices too

Inference of kinetic Ising model on sparse graphs

Based on dynamical cavity method, we propose an approach to the inference of kinetic Ising model, which asks to reconstruct couplings and external fields from given time-dependent output of original system. Our approach gives an exact result on tree graphs and a good approximation on sparse graphs, it can be seen as an extension of Belief Propagation inference of static Ising model to kinetic Ising model. While existing mean field methods to the kinetic Ising inference e.g., na\" ive mean-field, TAP equation and simply mean-field, use approximations which calculate magnetizations and correlations at time $t$ from statistics of data at time $t-1$, dynamical cavity method can use statistics of data at times earlier than $t-1$ to capture more correlations at different time steps. Extensive numerical experiments show that our inference method is superior to existing mean-field approaches on diluted networks.Comment: 9 pages, 3 figures, comments are welcom

Predictability in Systems with Many Characteristic Times: The Case of Turbulence

In chaotic dynamical systems, an infinitesimal perturbation is exponentially amplified at a time-rate given by the inverse of the maximum Lyapunov exponent $\lambda$. In fully developed turbulence, $\lambda$ grows as a power of the Reynolds number. This result could seem in contrast with phenomenological arguments suggesting that, as a consequence of `physical' perturbations, the predictability time is roughly given by the characteristic life-time of the large scale structures, and hence independent of the Reynolds number. We show that such a situation is present in generic systems with many degrees of freedom, since the growth of a non-infinitesimal perturbation is determined by cumulative effects of many different characteristic times and is unrelated to the maximum Lyapunov exponent. Our results are illustrated in a chain of coupled maps and in a shell model for the energy cascade in turbulence.Comment: 24 pages, 10 Postscript figures (included), RevTeX 3.0, files packed with uufile

Beyond inverse Ising model: structure of the analytical solution for a class of inverse problems

I consider the problem of deriving couplings of a statistical model from measured correlations, a task which generalizes the well-known inverse Ising problem. After reminding that such problem can be mapped on the one of expressing the entropy of a system as a function of its corresponding observables, I show the conditions under which this can be done without resorting to iterative algorithms. I find that inverse problems are local (the inverse Fisher information is sparse) whenever the corresponding models have a factorized form, and the entropy can be split in a sum of small cluster contributions. I illustrate these ideas through two examples (the Ising model on a tree and the one-dimensional periodic chain with arbitrary order interaction) and support the results with numerical simulations. The extension of these methods to more general scenarios is finally discussed.Comment: 15 pages, 6 figure

Growth of non-infinitesimal perturbations in turbulence

We discuss the effects of finite perturbations in fully developed turbulence by introducing a measure of the chaoticity degree associated to a given scale of the velocity field. This allows one to determine the predictability time for non-infinitesimal perturbations, generalizing the usual concept of maximum Lyapunov exponent. We also determine the scaling law for our indicator in the framework of the multifractal approach. We find that the scaling exponent is not sensitive to intermittency corrections, but is an invariant of the multifractal models. A numerical test of the results is performed in the shell model for the turbulent energy cascade.Comment: 4 pages, 2 Postscript figures (included), RevTeX 3.0, files packed with uufile