There is no Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs

Conventional wisdom holds that since continuous-time, Black-Scholes hedging is infinitely expensive in a model with proportional transaction costs, there is no continuous-time strategy which hedges a European call option perfectly. Of course, if one is attempting to dominate the European call rather than replicate it, then one can use the trivial strategy of buying one share of the underlying stock and holding to maturity. In this paper we prove that this is, in fact, the least expensive method of dominating a European call in a Black-Scholes model with proportional transaction costs

The M Dwarf GJ 436 and its Neptune-Mass Planet

We determine stellar parameters for the M dwarf GJ 436 that hosts a Neptune-mass planet. We employ primarily spectral modeling at low and high resolution, examining the agreement between model and observed optical spectra of five comparison stars of type, M0-M3. Modeling high resolution optical spectra suffers from uncertainties in TiO transitions, affecting the predicted strengths of both atomic and molecular lines in M dwarfs. The determination of Teff, gravity, and metallicity from optical spectra remains at ~10%. As molecules provide opacity both in lines and as an effective continuum, determing molecular transition parameters remains a challenge facing models such as the PHOENIX series, best verified with high resolution and spectrophotometric spectra. Our analysis of GJ 436 yields an effective temperature of Teff = 3350 +/- 300 K and a mass of 0.44 Msun. New Doppler measurements for GJ 436 with a precision of 3 m/s taken during 6 years improve the Keplerian model of the planet, giving a minimum mass, M sin i = 0.0713 Mjup = 22.6 Mearth, period, P = 2.6439 d, and e = 0.16 +/- 0.02. The noncircular orbit contrasts with the tidally circularized orbits of all close-in exoplanets, implying either ongoing pumping of eccentricity by a more distant companion, or a higher Q value for this low-mass planet. The velocities indeed reveal a long term trend, indicating a possible distant companion.Comment: 27 pages, 7 figures, accepted to PAS

Unified View of Scaling Laws for River Networks

Scaling laws that describe the structure of river networks are shown to follow from three simple assumptions. These assumptions are: (1) river networks are structurally self-similar, (2) single channels are self-affine, and (3) overland flow into channels occurs over a characteristic distance (drainage density is uniform). We obtain a complete set of scaling relations connecting the exponents of these scaling laws and find that only two of these exponents are independent. We further demonstrate that the two predominant descriptions of network structure (Tokunaga's law and Horton's laws) are equivalent in the case of landscapes with uniform drainage density. The results are tested with data from both real landscapes and a special class of random networks.Comment: 14 pages, 9 figures, 4 tables (converted to Revtex4, PRE ref added

Flood Proofing Low-Income Houses in India: an Application of Climate-Sensitive Probabilistic Benefit-Cost Analysis

Poor communities in high risk areas are disproportionately affected by disasters compared to their wealthy counterparts; yet, there are few analyses to guide public decisions on pro-poor investments in disaster risk reduction. This paper illustrates an application of benefit-cost analysis (BCA) for assessing investments in structural flood proofing of low-income, high-risk houses. The analysis takes account of climate change, which is increasingly viewed as an important consideration for assessing long-term investments. Specifically, the study focuses on the Rohini river basin of India and evaluates options for constructing non-permanent and permanent residential structures on a raised plinth to protect them against flooding. The estimates show a positive benefit-cost ratio for building new houses on a raised plinth, while the ratio is less than one for demolishing existing houses to rebuild on a raised plinth. Climate change is found to significantly affect the BCA results. From a policy perspective, the analysis demonstrates the potential economic returns of raised plinths for ‘building back better’ after disasters, or as a part of good housing design practice

Alternative approach to the optimality of the threshold strategy for spectrally negative Levy processes

Consider the optimal dividend problem for an insurance company whose uncontrolled surplus precess evolves as a spectrally negative Levy process. We assume that dividends are paid to the shareholders according to admissible strategies whose dividend rate is bounded by a constant. The objective is to find a dividend policy so as to maximize the expected discounted value of dividends which are paid to the shareholders until the company is ruined. Kyprianou, Loeffen and Perez [28] have shown that a refraction strategy (also called threshold strategy) forms an optimal strategy under the condition that the Levy measure has a completely monotone density. In this paper, we propose an alternative approach to this optimal problem.Comment: 16 page

Machine learning integrates genomic signatures for subclassification beyond primary and secondary acute myeloid leukemia

Although genomic alterations drive the pathogenesis of acute myeloid leukemia (AML), traditional classifications are largely based on morphology, and prototypic genetic founder lesions define only a small proportion of AML patients. The historical subdivision of primary/de novo AML and secondary AML has shown to variably correlate with genetic patterns. The combinatorial complexity and heterogeneity of AML genomic architecture may have thus far precluded genomic-based subclassification to identify distinct molecularly defined subtypes more reflective of shared pathogenesis. We integrated cytogenetic and gene sequencing data from a multicenter cohort of 6788 AML patients that were analyzed using standard and machine learning methods to generate a novel AML molecular subclassification with biologic correlates corresponding to underlying pathogenesis. Standard supervised analyses resulted in modest cross-validation accuracy when attempting to use molecular patterns to predict traditional pathomorphologic AML classifications. We performed unsupervised analysis by applying the Bayesian latent class method that identified 4 unique genomic clusters of distinct prognoses. Invariant genomic features driving each cluster were extracted and resulted in 97% cross-validation accuracy when used for genomic subclassification. Subclasses of AML defined by molecular signatures overlapped current pathomorphologic and clinically defined AML subtypes. We internally and externally validated our results and share an open-access molecular classification scheme for AML patients. Although the heterogeneity inherent in the genomic changes across nearly 7000 AML patients was too vast for traditional prediction methods, machine learning methods allowed for the definition of novel genomic AML subclasses, indicating that traditional pathomorphologic definitions may be less reflective of overlapping pathogenesis

Reciprocity as a foundation of financial economics

This paper argues that the subsistence of the fundamental theorem of contemporary financial mathematics is the ethical concept ‘reciprocity’. The argument is based on identifying an equivalence between the contemporary, and ostensibly ‘value neutral’, Fundamental Theory of Asset Pricing with theories of mathematical probability that emerged in the seventeenth century in the context of the ethical assessment of commercial contracts in a framework of Aristotelian ethics. This observation, the main claim of the paper, is justified on the basis of results from the Ultimatum Game and is analysed within a framework of Pragmatic philosophy. The analysis leads to the explanatory hypothesis that markets are centres of communicative action with reciprocity as a rule of discourse. The purpose of the paper is to reorientate financial economics to emphasise the objectives of cooperation and social cohesion and to this end, we offer specific policy advice