224 research outputs found
Projections, Pseudo-Stopping Times and the Immersion Property
Given two filtrations , we study under which
conditions the -optional projection and the -dual
optional projection coincide for the class of -optional processes
with integrable variation. It turns out that this property is equivalent to the
immersion property for and , that is every -local martingale is a -local martingale, which, equivalently, may
be characterised using the class of -pseudo-stopping times. We also
show that every -stopping time can be decomposed into the minimum of
two barrier hitting times
Random Time Forward Starting Options
We introduce a natural generalization of the forward-starting options, first
discussed by M. Rubinstein. The main feature of the contract presented here is
that the strike-determination time is not fixed ex-ante, but allowed to be
random, usually related to the occurrence of some event, either of financial
nature or not. We will call these options {\bf Random Time Forward Starting
(RTFS)}. We show that, under an appropriate "martingale preserving" hypothesis,
we can exhibit arbitrage free prices, which can be explicitly computed in many
classical market models, at least under independence between the random time
and the assets' prices. Practical implementations of the pricing methodologies
are also provided. Finally a credit value adjustment formula for these OTC
options is computed for the unilateral counterparty credit risk.Comment: 19 pages, 1 figur
On weak convergence of locally periodic functions
We prove a generalization of the fact that periodic functions converge weakly
to the mean value as the oscillation increases. Some convergence questions
connected to locally periodic nonlinear boundary value problems are also
considered.Comment: arxiv version is already officia
Drift dependence of optimal trade execution strategies under transient price impact
We give a complete solution to the problem of minimizing the expected
liquidity costs in presence of a general drift when the underlying market
impact model has linear transient price impact with exponential resilience. It
turns out that this problem is well-posed only if the drift is absolutely
continuous. Optimal strategies often do not exist, and when they do, they
depend strongly on the derivative of the drift. Our approach uses elements from
singular stochastic control, even though the problem is essentially
non-Markovian due to the transience of price impact and the lack in Markovian
structure of the underlying price process. As a corollary, we give a complete
solution to the minimization of a certain cost-risk criterion in our setting
On arbitrages arising from honest times
In the context of a general continuous financial market model, we study
whether the additional information associated with an honest time gives rise to
arbitrage profits. By relying on the theory of progressive enlargement of
filtrations, we explicitly show that no kind of arbitrage profit can ever be
realised strictly before an honest time, while classical arbitrage
opportunities can be realised exactly at an honest time as well as after an
honest time. Moreover, stronger arbitrages of the first kind can only be
obtained by trading as soon as an honest time occurs. We carefully study the
behavior of local martingale deflators and consider no-arbitrage-type
conditions weaker than NFLVR.Comment: 25 pages, revised versio
Calculus and heat flow in metric measure spaces and applications to spaces with Ricci bounds from below
This paper is devoted to a deeper understanding of the heat flow and to the
refinement of calculus tools on metric measure spaces (X,d,m). Our main results
are:
- A general study of the relations between the Hopf-Lax semigroup and
Hamilton-Jacobi equation in metric spaces (X,d).
- The equivalence of the heat flow in L^2(X,m) generated by a suitable
Dirichlet energy and the Wasserstein gradient flow of the relative entropy
functional in the space of probability measures P(X).
- The proof of density in energy of Lipschitz functions in the Sobolev space
W^{1,2}(X,d,m).
- A fine and very general analysis of the differentiability properties of a
large class of Kantorovich potentials, in connection with the optimal transport
problem.
Our results apply in particular to spaces satisfying Ricci curvature bounds
in the sense of Lott & Villani [30] and Sturm [39,40], and require neither the
doubling property nor the validity of the local Poincar\'e inequality.Comment: Minor typos corrected and many small improvements added. Lemma 2.4,
Lemma 2.10, Prop. 5.7, Rem. 5.8, Thm. 6.3 added. Rem. 4.7, Prop. 4.8, Prop.
4.15 and Thm 4.16 augmented/reenforced. Proof of Thm. 4.16 and Lemma 9.6
simplified. Thm. 8.6 corrected. A simpler axiomatization of weak gradients,
still equivalent to all other ones, has been propose
Two refreshing views of Fluctuation Theorems through Kinematics Elements and Exponential Martingale
In the context of Markov evolution, we present two original approaches to
obtain Generalized Fluctuation-Dissipation Theorems (GFDT), by using the
language of stochastic derivatives and by using a family of exponential
martingales functionals. We show that GFDT are perturbative versions of
relations verified by these exponential martingales. Along the way, we prove
GFDT and Fluctuation Relations (FR) for general Markov processes, beyond the
usual proof for diffusion and pure jump processes. Finally, we relate the FR to
a family of backward and forward exponential martingales.Comment: 41 pages, 7 figures; version2: 45 pages, 7 figures, minor revisions,
new results in Section
Regularity Properties and Pathologies of Position-Space Renormalization-Group Transformations
We reconsider the conceptual foundations of the renormalization-group (RG)
formalism, and prove some rigorous theorems on the regularity properties and
possible pathologies of the RG map. Regarding regularity, we show that the RG
map, defined on a suitable space of interactions (= formal Hamiltonians), is
always single-valued and Lipschitz continuous on its domain of definition. This
rules out a recently proposed scenario for the RG description of first-order
phase transitions. On the pathological side, we make rigorous some arguments of
Griffiths, Pearce and Israel, and prove in several cases that the renormalized
measure is not a Gibbs measure for any reasonable interaction. This means that
the RG map is ill-defined, and that the conventional RG description of
first-order phase transitions is not universally valid. For decimation or
Kadanoff transformations applied to the Ising model in dimension ,
these pathologies occur in a full neighborhood of the low-temperature part of the first-order
phase-transition surface. For block-averaging transformations applied to the
Ising model in dimension , the pathologies occur at low temperatures
for arbitrary magnetic-field strength. Pathologies may also occur in the
critical region for Ising models in dimension . We discuss in detail
the distinction between Gibbsian and non-Gibbsian measures, and give a rather
complete catalogue of the known examples. Finally, we discuss the heuristic and
numerical evidence on RG pathologies in the light of our rigorous theorems.Comment: 273 pages including 14 figures, Postscript, See also
ftp.scri.fsu.edu:hep-lat/papers/9210/9210032.ps.
Affine term structure models : a time-changed approach with perfect fit to market curves
We address the so-called calibration problem which consists of fitting in a
tractable way a given model to a specified term structure like, e.g., yield or
default probability curves. Time-homogeneous jump-diffusions like Vasicek or
Cox-Ingersoll-Ross (possibly coupled with compounded Poisson jumps, JCIR), are
tractable processes but have limited flexibility; they fail to replicate actual
market curves. The deterministic shift extension of the latter (Hull-White or
JCIR++) is a simple but yet efficient solution that is widely used by both
academics and practitioners. However, the shift approach is often not
appropriate when positivity is required, which is a common constraint when
dealing with credit spreads or default intensities. In this paper, we tackle
this problem by adopting a time change approach. On the top of providing an
elegant solution to the calibration problem under positivity constraint, our
model features additional interesting properties in terms of implied
volatilities. It is compared to the shift extension on various credit risk
applications such as credit default swap, credit default swaption and credit
valuation adjustment under wrong-way risk. The time change approach is able to
generate much larger volatility and covariance effects under the positivity
constraint. Our model offers an appealing alternative to the shift in such
cases.Comment: 44 pages, figures and table
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