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

Incentive-Compatible Surveys via Posterior Probabilities

We consider the problem of eliciting truthful responses to a survey question when the respondents share a common prior that the survey planner is agnostic about. The planner would therefore like to have a "universal” mechanism, which would induce honest answers for all possible priors. If the planner also requires a locality condition that ensures that the mechanism payoffs are determined by the respondents' posterior probabilities of the true state of nature, we prove that, under additional smoothness and sensitivity conditions, the payoff in the truth-telling equilibrium must be a logarithmic function of those posterior probabilities. Moreover, the respondents are necessarily ranked according to those probabilities. Finally, we discuss implementation issues

Satellitome Analysis of the Pacific Oyster Crassostrea gigas Reveals New Pattern of Satellite DNA Organization, Highly Scattered across the Genome

Several features already qualified the invasive bivalve species Crassostrea gigas as a valuable non-standard model organism in genome research. C. gigas is characterized by the low contribution of satellite DNAs (satDNAs) vs. mobile elements and has an extremely low amount of heterochromatin, predominantly built of DNA transposons. In this work, we have identified 52 satDNAs composing the satellitome of C. gigas and constituting about 6.33% of the genome. Satellitome analysis reveals unusual, highly scattered organization of relatively short satDNA arrays across the whole genome. However, peculiar chromosomal distribution and densities are specific for each satDNA. The inspection of the organizational forms of the 11 most abundant satDNAs shows association with constitutive parts of Helitron mobile elements. Nine of the inspected satDNAs are dominantly found in mobile element-associated form, two mostly appear standalone, and only one is present exclusively as Helitron-associated sequence. The Helitron-related satDNAs appear in more chromosomes than other satDNAs, indicating that these mobile elements could be leading satDNA propagation in C. gigas. No significant accumulation of satDNAs on certain chromosomal positions was detected in C. gigas, thus establishing a novel pattern of satDNA organization on the genome level

On the Existence of Shadow Prices

For utility maximization problems under proportional transaction costs, it has been observed that the original market with transaction costs can sometimes be replaced by a frictionless "shadow market" that yields the same optimal strategy and utility. However, the question of whether or not this indeed holds in generality has remained elusive so far. In this paper we present a counterexample which shows that shadow prices may fail to exist. On the other hand, we prove that short selling constraints are a sufficient condition to warrant their existence, even in very general multi-currency market models with possibly discontinuous bid-ask-spreads.Comment: 14 pages, 1 figure, to appear in "Finance and Stochastics

Systemic Risk and Default Clustering for Large Financial Systems

As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and computational tools for the quantification of such phenomena. Limiting analysis such as law of large numbers and central limit theorems allow to approximate the distribution in large systems and study quantities such as the loss distribution in large portfolios. Large deviations analysis allow us to study the tail of the loss distribution and to identify pathways to default clustering. Sensitivity analysis allows to understand the most likely ways in which different effects, such as contagion and systematic risks, combine to lead to large default rates. Such results could give useful insights into how to optimally safeguard against such events.Comment: in Large Deviations and Asymptotic Methods in Finance, (Editors: P. Friz, J. Gatheral, A. Gulisashvili, A. Jacqier, J. Teichmann) , Springer Proceedings in Mathematics and Statistics, Vol. 110 2015

Arbitrage and deflators in illiquid markets

This paper presents a stochastic model for discrete-time trading in financial markets where trading costs are given by convex cost functions and portfolios are constrained by convex sets. The model does not assume the existence of a cash account/numeraire. In addition to classical frictionless markets and markets with transaction costs or bid-ask spreads, our framework covers markets with nonlinear illiquidity effects for large instantaneous trades. In the presence of nonlinearities, the classical notion of arbitrage turns out to have two equally meaningful generalizations, a marginal and a scalable one. We study their relations to state price deflators by analyzing two auxiliary market models describing the local and global behavior of the cost functions and constraints

Own-company stockholding and work effort preferences of an unconstrained executive

We develop a framework for analyzing an executive's own-company stockholding and work effort preferences. The executive, characterized by risk aversion and work effectiveness parameters, invests his personal wealth without constraint in the financial market, including the stock of his own company whose value he can directly influence with work effort. The executive's utility-maximizing personal investment and work effort strategy is derived in closed form, and a utility indifference rationale is applied to determine his required compensation. Being unconstrained byperformance contracting, the executive's work effort strategy establishes a base case for theoretical or empirical assessment of the benefits or otherwise of constraining executives with performance contracting

Gaussian density estimates for the solution of singular stochastic Riccati equations

summary:Stochastic Riccati equation is a backward stochastic differential equation with singular generator which arises naturally in the study of stochastic linear-quadratic optimal control problems. In this paper, we obtain Gaussian density estimates for the solutions to this equation

Sequence composition underlying centromeric and heterochromatic genome compartments of the Pacific oyster Crassostrea gigas

Segments of the genome enriched in repetitive sequences still present a challenge and are omitted in genome assemblies. For that reason, the exact composition of DNA sequences underlying the heterochromatic regions and the active centromeres are still unexplored for many organisms. The centromere is a crucial region of eukaryotic chromosomes responsible for the accurate segregation of genetic material. The typical landmark of centromere chromatin is the rapidly-evolving variant of the histone H3, CenH3, while DNA sequences packed in constitutive heterochromatin are associated with H3K9me3-modified histones. In the Pacific oyster Crassostrea gigas we identified its centromere histone variant, Cg-CenH3, that shows stage-specific distribution in gonadal cells. In order to investigate the DNA composition of genomic regions associated with the two specific chromatin types, we employed chromatin immunoprecipitation followed by high-throughput next-generation sequencing of the Cg-CenH3- and H3K9me3-associated sequences. CenH3-associated sequences were assigned to six groups of repetitive elements, while H3K9me3-associated-ones were assigned only to three. Those associated with CenH3 indicate the lack of uniformity in the chromosomal distribution of sequences building the centromeres, being also in the same time dispersed throughout the genome. The heterochromatin of C. gigas exhibited general paucity and limited chromosomal localization as predicted, with H3K9me3-associated sequences being predominantly constituted of DNA transposons