A Non-Gaussian Option Pricing Model with Skew

Closed form option pricing formulae explaining skew and smile are obtained within a parsimonious non-Gaussian framework. We extend the non-Gaussian option pricing model of L. Borland (Quantitative Finance, {\bf 2}, 415-431, 2002) to include volatility-stock correlations consistent with the leverage effect. A generalized Black-Scholes partial differential equation for this model is obtained, together with closed-form approximate solutions for the fair price of a European call option. In certain limits, the standard Black-Scholes model is recovered, as is the Constant Elasticity of Variance (CEV) model of Cox and Ross. Alternative methods of solution to that model are thereby also discussed. The model parameters are partially fit from empirical observations of the distribution of the underlying. The option pricing model then predicts European call prices which fit well to empirical market data over several maturities.Comment: 37 pages, 11 ps figures, minor changes, typos corrected, to appear in Quantitative Financ

Evidence of Deep Water Penetration in Silica during Stress Corrosion Fracture

We measure the thickness of the heavy water layer trapped under the stress corrosion fracture surface of silica using neutron reflectivity experiments. We show that the penetration depth is 65–85 Å, suggesting the presence of a damaged zone of ~100 Å extending ahead of the crack tip during its propagation. This estimate of the size of the damaged zone is compatible with other recent results

Anomalous price impact and the critical nature of liquidity in financial markets

We propose a dynamical theory of market liquidity that predicts that the average supply/demand profile is V-shaped and {\it vanishes} around the current price. This result is generic, and only relies on mild assumptions about the order flow and on the fact that prices are (to a first approximation) diffusive. This naturally accounts for two striking stylized facts: first, large metaorders have to be fragmented in order to be digested by the liquidity funnel, leading to long-memory in the sign of the order flow. Second, the anomalously small local liquidity induces a breakdown of linear response and a diverging impact of small orders, explaining the "square-root" impact law, for which we provide additional empirical support. Finally, we test our arguments quantitatively using a numerical model of order flow based on the same minimal ingredients.Comment: 16 pages, 7 figure

Statistical Mechanics of a Two-Dimensional System with Long Range Interaction

We analyse the statistical physics of a two dimensional lattice based gas with long range interactions. The particles interact in a way analogous to Queens on a chess board. The long range nature of the interaction gives the mathematics of the problem a simple geometric structure which simplifies both the analytic and numerical study of the system. We present some analytic calculations for the statics of the problem and also we perform Monte Carlo simulations which exhibit a dynamical transition between a high temperature liquid regime and a low temperature glassy regime exhibiting aging in the two time correlation functions.Comment: 9 pages, 8 figure

Multiple scaling regimes in simple aging models

We investigate aging in glassy systems based on a simple model, where a point in configuration space performs thermally activated jumps between the minima of a random energy landscape. The model allows us to show explicitly a subaging behavior and multiple scaling regimes for the correlation function. Both the exponents characterizing the scaling of the different relaxation times with the waiting time and those characterizing the asymptotic decay of the scaling functions are obtained analytically by invoking a `partial equilibrium' concept.Comment: 4 pages, 3 figure

Dynamics of particles and manifolds in a quenched random force field

We study the dynamics of a directed manifold of internal dimension D in a d-dimensional random force field. We obtain an exact solution for $d \to \infty$ and a Hartree approximation for finite d. They yield a Flory-like roughness exponent $\zeta$ and a non trivial anomalous diffusion exponent $\nu$ continuously dependent on the ratio $g_{T}/g_{L}$ of divergence-free ($g_{T}$) to potential ($g_{L}$) disorder strength. For the particle (D=0) our results agree with previous order $\epsilon^2$ RG calculations. The time-translational invariant dynamics for $g_{T} >0$ smoothly crosses over to the previously studied ultrametric aging solution in the potential case.Comment: 5 pages, Latex fil

Delta Hedged Option Valuation with Underlying Non-Gaussian Returns

The standard Black-Scholes theory of option pricing is extended to cope with underlying return fluctuations described by general probability distributions. A Langevin process and its related Fokker-Planck equation are devised to model the market stochastic dynamics, allowing us to write and formally solve the generalized Black-Scholes equation implied by dynamical hedging. A systematic expansion around a non-perturbative starting point is then implemented, recovering the Matacz's conjectured option pricing expression. We perform an application of our formalism to the real stock market and find clear evidence that while past financial time series can be used to evaluate option prices before the expiry date with reasonable accuracy, the stochastic character of volatility is an essential ingredient that should necessarily be taken into account in analytical option price modeling.Comment: Four pages; two eps figure

Individual and collective stock dynamics: intra-day seasonalities

We establish several new stylised facts concerning the intra-day seasonalities of stock dynamics. Beyond the well known U-shaped pattern of the volatility, we find that the average correlation between stocks increases throughout the day, leading to a smaller relative dispersion between stocks. Somewhat paradoxically, the kurtosis (a measure of volatility surprises) reaches a minimum at the open of the market, when the volatility is at its peak. We confirm that the dispersion kurtosis is a markedly decreasing function of the index return. This means that during large market swings, the idiosyncratic component of the stock dynamics becomes sub-dominant. In a nutshell, early hours of trading are dominated by idiosyncratic or sector specific effects with little surprises, whereas the influence of the market factor increases throughout the day, and surprises become more frequent.Comment: 9 pages, 7 figure

Dynamical ultrametricity in the critical trap model

We show that the trap model at its critical temperature presents dynamical ultrametricity in the sense of Cugliandolo and Kurchan [CuKu94]. We use the explicit analytic solution of this model to discuss several issues that arise in the context of mean-field glassy dynamics, such as the scaling form of the correlation function, and the finite time (or finite forcing) corrections to ultrametricity, that are found to decay only logarithmically with the associated time scale, as well as the fluctuation dissipation ratio. We also argue that in the multilevel trap model, the short time dynamics is dominated by the level which is at its critical temperature, so that dynamical ultrametricity should hold in the whole glassy temperature range. We revisit some experimental data on spin-glasses in light of these results.Comment: 7 pages, 4 .eps figures. submitted to J. Phys.