Functional limit theorems for generalized variations of the fractional Brownian sheet

We prove functional central and non-central limit theorems for generalized variations of the anisotropic $d$-parameter fractional Brownian sheet (fBs) for any natural number $d$. Whether the central or the non-central limit theorem applies depends on the Hermite rank of the variation functional and on the smallest component of the Hurst parameter vector of the fBs. The limiting process in the former result is another fBs, independent of the original fBs, whereas the limit given by the latter result is an Hermite sheet, which is driven by the same white noise as the original fBs. As an application, we derive functional limit theorems for power variations of the fBs and discuss what is a proper way to interpolate them to ensure functional convergence.Comment: Published at http://dx.doi.org/10.3150/15-BEJ707 in the Bernoulli (http://isi.cbs.nl/bernoulli/) by the International Statistical Institute/Bernoulli Society (http://isi.cbs.nl/BS/bshome.htm

Arbitrage without borrowing or short selling?

We show that a trader, who starts with no initial wealth and is not allowed to borrow money or short sell assets, is theoretically able to attain positive wealth by continuous trading, provided that she has perfect foresight of future asset prices, given by a continuous semimartingale. Such an arbitrage strategy can be constructed as a process of finite variation that satisfies a seemingly innocuous self-financing condition, formulated using a pathwise Riemann-Stieltjes integral. Our result exemplifies the potential intricacies of formulating economically meaningful self-financing conditions in continuous time, when one leaves the conventional arbitrage-free framework.Comment: 14 pages, 1 figure, v2: minor revision, to appear in Mathematics and Financial Economic

Hybrid marked point processes: characterisation, existence and uniqueness

We introduce a class of hybrid marked point processes, which encompasses and extends continuous-time Markov chains and Hawkes processes. While this flexible class amalgamates such existing processes, it also contains novel processes with complex dynamics. These processes are defined implicitly via their intensity and are endowed with a state process that interacts with past-dependent events. The key example we entertain is an extension of a Hawkes process, a state-dependent Hawkes process interacting with its state process. We show the existence and uniqueness of hybrid marked point processes under general assumptions, extending the results of Massouli\'e (1998) on interacting point processes.Comment: v6: introduction updated with reference to application of state-dependent Hawkes processe

On the Existence of Consistent Price Systems

We formulate a sufficient condition for the existence of a consistent price system (CPS), which is weaker than the conditional full support condition (CFS) introduced by Guasoni, Rasonyi, and Schachermayer [Ann. Appl. Probab., 18(2008), pp. 491-520] . We use the new condition to show the existence of CPSs for certain processes that fail to have the CFS property. In particular this condition gives sufficient conditions, under which a continuous function of a process with CFS admits a CPS, while the CFS property might be lost.Comment: To appear in "Stochastic Analysis and Applications". Keywords: Consistent pricing systems, No-arbitrage, Transaction costs, Full support, Conditional Full Support, Stability under Composition with Continuous Function

Stochastic integrals and conditional full support

We present conditions that imply the conditional full support (CFS) property, introduced by Guasoni, R\'asonyi, and Schachermayer [Ann. Appl. Probab., 18 (2008), pp. 491--520], for processes Z := H + K \cdot W, where W is a Brownian motion, H is a continuous process, and processes H and K are either progressive or independent of W. Moreover, in the latter case under an additional assumption that K is of finite variation, we present conditions under which Z has CFS also when W is replaced with a general continuous process with CFS. As applications of these results, we show that several stochastic volatility models and the solutions of certain stochastic differential equations have CFS.Comment: 19 pages, v3: almost entirely rewritten, new result

Brownian semistationary processes and conditional full support

In this note, we study the infinite-dimensional conditional laws of Brownian semistationary processes. Motivated by the fact that these processes are typically not semimartingales, we present sufficient conditions ensuring that a Brownian semistationary process has conditional full support, a property introduced by Guasoni, R\'asonyi, and Schachermayer [Ann. Appl. Probab., 18 (2008) pp. 491--520]. By the results of Guasoni, R\'asonyi, and Schachermayer, this property has two important implications. It ensures, firstly, that the process admits no free lunches under proportional transaction costs, and secondly, that it can be approximated pathwise (in the sup norm) by semimartingales that admit equivalent martingale measures.Comment: 7 page

Hybrid scheme for Brownian semistationary processes

We introduce a simulation scheme for Brownian semistationary processes, which is based on discretizing the stochastic integral representation of the process in the time domain. We assume that the kernel function of the process is regularly varying at zero. The novel feature of the scheme is to approximate the kernel function by a power function near zero and by a step function elsewhere. The resulting approximation of the process is a combination of Wiener integrals of the power function and a Riemann sum, which is why we call this method a hybrid scheme. Our main theoretical result describes the asymptotics of the mean square error of the hybrid scheme and we observe that the scheme leads to a substantial improvement of accuracy compared to the ordinary forward Riemann-sum scheme, while having the same computational complexity. We exemplify the use of the hybrid scheme by two numerical experiments, where we examine the finite-sample properties of an estimator of the roughness parameter of a Brownian semistationary process and study Monte Carlo option pricing in the rough Bergomi model of Bayer et al. [Quant. Finance 16(6), 887-904, 2016], respectively.Comment: 33 pages, 4 figures, v4: minor revision, in particular we have derived a new expression (3.5), equivalent to the previous one but numerically more convenient, for the off-diagonal elements of the covariance matrix Sigm

Sticky continuous processes have consistent price systems

Under proportional transaction costs, a price process is said to have a consistent price system, if there is a semimartingale with an equivalent martingale measure that evolves within the bid-ask spread. We show that a continuous, multi-asset price process has a consistent price system, under arbitrarily small proportional transaction costs, if it satisfies a natural multi-dimensional generalization of the stickiness condition introduced by Guasoni [Math. Finance 16(3), 569-582 (2006)].Comment: 10 pages, v3: incorporates minor corrections and the proof of the main result has been clarified, to appear in Journal of Applied Probabilit