Ergodic transition in a simple model of the continuous double auction

We study a phenomenological model for the continuous double auction, whose aggregate order process is equivalent to two independent M/M/1 queues. The continuous double auction defines a continuous-time random walk for trade prices. The conditions for ergodicity of the auction are derived and, as a consequence, three possible regimes in the behavior of prices and logarithmic returns are observed. In the ergodic regime, prices are unstable and one can observe a heteroskedastic behavior in the logarithmic returns. On the contrary, non-ergodicity triggers stability of prices, even if two different regimes can be seen

The fine structure of spectral properties for random correlation matrices: an application to financial markets

We study some properties of eigenvalue spectra of financial correlation matrices. In particular, we investigate the nature of the large eigenvalue bulks which are observed empirically, and which have often been regarded as a consequence of the supposedly large amount of noise contained in financial data. We challenge this common knowledge by acting on the empirical correlation matrices of two data sets with a filtering procedure which highlights some of the cluster structure they contain, and we analyze the consequences of such filtering on eigenvalue spectra. We show that empirically observed eigenvalue bulks emerge as superpositions of smaller structures, which in turn emerge as a consequence of cross-correlations between stocks. We interpret and corroborate these findings in terms of factor models, and and we compare empirical spectra to those predicted by Random Matrix Theory for such models.Comment: 21 pages, 10 figure

Honesty by typing

We propose a type system for a calculus of contracting processes. Processes may stipulate contracts, and then either behave honestly, by keeping the promises made, or not. Type safety guarantees that a typeable process is honest - that is, the process abides by the contract it has stipulated in all possible contexts, even those containing dishonest adversaries

The Hausdorff moments in statistical mechanics

A new method for solving the Hausdorff moment problem is presented which makes use of Pollaczek polynomials. This problem is severely ill posed; a regularized solution is obtained without any use of prior knowledge. When the problem is treated in the L 2 space and the moments are finite in number and affected by noise or round‐off errors, the approximation converges asymptotically in the L 2 norm. The method is applied to various questions of statistical mechanics and in particular to the determination of the density of states. Concerning this latter problem the method is extended to include distribution valued densities. Computing the Laplace transform of the expansion a new series representation of the partition function Z(β) (β=1/k BT ) is obtained which coincides with a Watson resummation of the high‐temperature series for Z(β)

Pair-correlation function in 2-dimensional lattice gases

The pair-correlation function in two-dimensional lattice gases is computed by means of three discretized classical equations for the structure of liquids: the hypernetted-chain, the Percus-Yevick, and the crossover integral equations. The equations are numerically solved by an iteration procedure. Two different systems are considered: the Ising-Peierls lattice gas with nearest-neighbor interactions and a model for O adsorbed on the W(110) surface, in which interactions up to the fourth neighbors are taken into account. The values of the pair-correlation function for nearest, next-nearest, and next-next-nearest neighbors are compared with the results of Monte Carlo simulations at four different coverages Θ (Θ=1/8, 1) / 4 ,1/2,3/4) as functions of the lateral coupling. It turns out that the crossover integral equation gives the best agreement with Monte Carlo data in both systems, being accurate especially at low Θ, whereas the Percus-Yevick equation fails in a wide range of parameters

Limit theorems for prices of options written on semi-Markov processes

We consider plain vanilla European options written on an underlying asset that follows a continuous time semi-Markov multiplicative process. We derive a formula and a renewal type equation for the martingale option price. In the case in which intertrade times follow the Mittag-Leffler distribution, under appropriate scaling, we prove that these option prices converge to the price of an option written on geometric Brownian motion time-changed with the inverse stable subordinator. For geometric Brownian motion time changed with an inverse subordinator, in the more general case when the subordinator’s Laplace exponent is a special Bernstein function, we derive a time-fractional generalization of the equation of Black and Scholes

City@home: Monte Carlo derivative pricing distributed on networked computers

Monte Carlo is a powerful and versatile derivative pricing tool, with the main drawback of requiring a large amount of computing time to generate enough realisations of the stochastic process. However, since realisations are independent from each other, the task is “embarrassingly” parallel and the workload can be easily distributed on a large set of processors without the need for fast networking and thus an expensive dedicated supercomputer. Such an alternative, much cheaper and more accessible way can be realised with the BOINC toolkit, distributing the Monte Carlo runs on networked clients running under Windows, Linux or various Unix variants, and recollecting the results at the end for a statistical evaluation of the price distribution at the final time. Though it is likely that the clients will belong to the intranet of a large company or institution, we gave our program the evocative name City@home in honour of the paradigmatic SETI@home project. As an application, we present the generation of synthetic high frequency financial time series for speculative option valuation in the context of uncoupled continuous-time random walks (fractional diffusion), with a Lévy marginal density function for the tick-by-tick log returns and a Mittag-Leffler marginal density function for the waiting times. Lévy deviates are generated with the Chambers-Mallows-Stuck method, Mittag-Leffler deviates with the Kozubowski-Pakes method

Verifying message-passing programs with dependent behavioural types

Concurrent and distributed programming is notoriously hard. Modern languages and toolkits ease this difficulty by offering message-passing abstractions, such as actors (e.g., Erlang, Akka, Orleans) or processes (e.g., Go): they allow for simpler reasoning w.r.t. shared-memory concurrency, but do not ensure that a program implements a given specification. To address this challenge, it would be desirable to specify and verify the intended behaviour of message-passing applications using types, and ensure that, if a program type-checks and compiles, then it will run and communicate as desired. We develop this idea in theory and practice. We formalise a concurrent functional language λπ ⩽, with a new blend of behavioural types (from π-calculus theory), and dependent function types (from the Dotty programming language, a.k.a. the future Scala 3). Our theory yields four main payoffs: (1) it verifies safety and liveness properties of programs via type– level model checking; (2) unlike previous work, it accurately verifies channel-passing (covering a typical pattern of actor programs) and higher-order interaction (i.e., sending/receiving mobile code); (3) it is directly embedded in Dotty, as a toolkit called Effpi, offering a simplified actor-based API; (4) it enables an efficient runtime system for Effpi, for highly concurrent programs with millions of processes/actors

A stylized model for the continuous double auction

A stylized phenomenological model for the continuous double auction is introduced. This model is equivalent to two uncoupled M/M/1 queues. The conditions for statistical equilibrium (ergodicity) are derived. The results of Monte Carlo simulations are presented on the behaviour of price differences and log-returns