Superhedging in illiquid markets

We study contingent claims in a discrete-time market model where trading costs are given by convex functions and portfolios are constrained by convex sets. 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. We derive dual characterizations of superhedging conditions for contingent claim processes in a market without a cash account. The characterizations are given in terms of stochastic discount factors that correspond to martingale densities in a market with a cash account. The dual representations are valid under a topological condition and a weak consistency condition reminiscent of the ``law of one price'', both of which are implied by the no arbitrage condition in the case of classical perfectly liquid market models. We give alternative sufficient conditions that apply to market models with nonlinear cost functions and portfolio constraints

Flux-tube Structure, Sum Rules and Beta-functions in SU(2)

Action and energy flux-tube profiles are computed, in SU(2) with beta=2.4,2.5, for two quarks up to 1 fm apart and for which the colour fields are in their ground state (A_1g) and the first (E_u) and higher (A'_1g) excited gluonic states. When these profiles are integrated over all space, a scaling comparison is made between the beta=2.4 and 2.5 data. Using sum rules, these integrated forms also permit an estimate to be made of generalised beta-functions giving b(2.4)=-0.312(15), b(2.5)=-0.323(9), f(2.4)=0.65(1) and f(2.5)=0.68(1). When the profiles are integrated only over planes transverse to the interquark line and assuming underlying string features, scaling comparisons are again made near the centres of the interquark line for the largest interquark distances. For the A'_{1g} case, some of the profiles exhibit a 'dip-like' structure characteristic of the Isgur-Paton model.Comment: 3 pages, 6 eps figures. Presented at LATTICE9

Liability-driven investment in longevity risk management

This paper studies optimal investment from the point of view of an investor with longevity-linked liabilities. The relevant optimization problems rarely are analytically tractable, but we are able to show numerically that liability driven investment can significantly outperform common strategies that do not take the liabilities into account. In problems without liabilities the advantage disappears, which suggests that the superiority of the proposed strategies is indeed based on connections between liabilities and asset returns

Comparing improved actions for SU(2)

In order to help the user in choosing the right action a performance comparison is done for seven improved actions. Six of them are Symanzik improved, one at tree-level and two at one-loop, all with or without tadpole improvement. The seventh is an approximate fixed point action. Observables are static on- and off-axis two-body potentials and four-body binding energies, whose precision is compared when the same amount of computer time is used by the programs.Comment: 3 pages, 3 colour eps figures. Presented at LATTICE9

Reduced form modeling of limit order markets

This paper proposes a parametric approach for stochastic modeling of limit order markets. The models are obtained by augmenting classical perfectly liquid market models by few additional risk factors that describe liquidity properties of the order book. The resulting models are easy to calibrate and to analyze using standard techniques for multivariate stochastic processes. Despite their simplicity, the models are able to capture several properties that have been found in microstructural analysis of limit order markets. Calibration of a continuous-time three-factor model to Copenhagen Stock Exchange data exhibits e.g.\ mean reversion in liquidity as well as the so called crowding out effect which influences subsequent mid-price moves. Our dynamic models are well suited also for analyzing market resiliency after liquidity shocks

Reduced form models of bond portfolios

We derive simple return models for several classes of bond portfolios. With only one or two risk factors our models are able to explain most of the return variations in portfolios of fixed rate government bonds, inflation linked government bonds and investment grade corporate bonds. The underlying risk factors have natural interpretations which make the models well suited for risk management and portfolio design