Arbitrage-free SVI volatility surfaces

In this article, we show how to calibrate the widely-used SVI parameterization of the implied volatility surface in such a way as to guarantee the absence of static arbitrage. In particular, we exhibit a large class of arbitrage-free SVI volatility surfaces with a simple closed-form representation. We demonstrate the high quality of typical SVI fits with a numerical example using recent SPX options data.Comment: 25 pages, 6 figures Corrected some typos. Extended bibliography. Paper restructured, Main theorem (Theorem 4.1) improved. Proof of Theorem 4.3 amende

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

Jets in Effective Theory: Summing Phase Space Logs

We demonstrate how to resum phase space logarithms in the Sterman-Weinberg (SW) dijet decay rate within the context of Soft Collinear Effective theory (SCET). An operator basis corresponding to two and three jet events is defined in SCET and renormalized. We obtain the RGE of the two and three jet operators and run the operators from the scale $\mu^2 = Q^2$ to the phase space scale $\mu^2_\delta = \delta^2 Q^2$. This phase space scale, where $\delta$ is the cone half angle of the jet, defines the angular region of the jet. At $\mu^2_{\delta}$ we determine the mixing of the three and two jet operators. We combine these results with the running of the two jet shape function, which we run down to an energy cut scale $\mu^2_{\beta}$. This defines the resumed SW dijet decay rate in the context of SCET. The approach outlined here demonstrates how to establish a jet definition in the context of SCET. This allows a program of systematically improving the theoretical precision of jet phenomenology to be carried out.Comment: 25 pages, 4 figures, V2: Typos fixed, writing clarified, detail on PSRG added. Matching onto jet definition changed to taking place at collinear scal

Time-Changed Fast Mean-Reverting Stochastic Volatility Models

We introduce a class of randomly time-changed fast mean-reverting stochastic volatility models and, using spectral theory and singular perturbation techniques, we derive an approximation for the prices of European options in this setting. Three examples of random time-changes are provided and the implied volatility surfaces induced by these time-changes are examined as a function of the model parameters. Three key features of our framework are that we are able to incorporate jumps into the price process of the underlying asset, allow for the leverage effect, and accommodate multiple factors of volatility, which operate on different time-scales

An Optimal Execution Problem with Market Impact

We study an optimal execution problem in a continuous-time market model that considers market impact. We formulate the problem as a stochastic control problem and investigate properties of the corresponding value function. We find that right-continuity at the time origin is associated with the strength of market impact for large sales, otherwise the value function is continuous. Moreover, we show the semi-group property (Bellman principle) and characterise the value function as a viscosity solution of the corresponding Hamilton-Jacobi-Bellman equation. We introduce some examples where the forms of the optimal strategies change completely, depending on the amount of the trader's security holdings and where optimal strategies in the Black-Scholes type market with nonlinear market impact are not block liquidation but gradual liquidation, even when the trader is risk-neutral.Comment: 36 pages, 8 figures, a modified version of the article "An optimal execution problem with market impact" in Finance and Stochastics (2014

On small time asymptotics for rough differential equations driven by fractional Brownian motions

We survey existing results concerning the study in small times of the density of the solution of a rough differential equation driven by fractional Brownian motions. We also slightly improve existing results and discuss some possible applications to mathematical finance.Comment: This is a survey paper, submitted to proceedings in the memory of Peter Laurenc

Light--like Wilson loops and gauge invariance of Yang--Mills theory in 1+1 dimensions

A light-like Wilson loop is computed in perturbation theory up to ${\cal O} (g^4)$ for pure Yang--Mills theory in 1+1 dimensions, using Feynman and light--cone gauges to check its gauge invariance. After dimensional regularization in intermediate steps, a finite gauge invariant result is obtained, which however does not exhibit abelian exponentiation. Our result is at variance with the common belief that pure Yang--Mills theory is free in 1+1 dimensions, apart perhaps from topological effects.Comment: 10 pages, plain TeX, DFPD 94/TH/

On planar gluon amplitudes/Wilson loops duality

There is growing evidence that on-shell gluon scattering amplitudes in planar N=4 SYM theory are equivalent to Wilson loops evaluated over contours consisting of straight, light-like segments defined by the momenta of the external gluons. This equivalence was first suggested at strong coupling using the AdS/CFT correspondence and has since been verified at weak coupling to one loop in perturbation theory. Here we perform an explicit two-loop calculation of the Wilson loop dual to the four-gluon scattering amplitude and demonstrate that the relation holds beyond one loop. We also propose an anomalous conformal Ward identity which uniquely fixes the form of the finite part (up to an additive constant) of the Wilson loop dual to four- and five-gluon amplitudes, in complete agreement with the BDS conjecture for the multi-gluon MHV amplitudes.Comment: 16 pages, 1 figure. v2: minor correction