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

Random Time Forward Starting Options

We introduce a natural generalization of the forward-starting options, first discussed by M. Rubinstein. The main feature of the contract presented here is that the strike-determination time is not fixed ex-ante, but allowed to be random, usually related to the occurrence of some event, either of financial nature or not. We will call these options {\bf Random Time Forward Starting (RTFS)}. We show that, under an appropriate "martingale preserving" hypothesis, we can exhibit arbitrage free prices, which can be explicitly computed in many classical market models, at least under independence between the random time and the assets' prices. Practical implementations of the pricing methodologies are also provided. Finally a credit value adjustment formula for these OTC options is computed for the unilateral counterparty credit risk.Comment: 19 pages, 1 figur

Optimal Multi-Modes Switching Problem in Infinite Horizon

This paper studies the problem of the deterministic version of the Verification Theorem for the optimal m-states switching in infinite horizon under Markovian framework with arbitrary switching cost functions. The problem is formulated as an extended impulse control problem and solved by means of probabilistic tools such as the Snell envelop of processes and reflected backward stochastic differential equations. A viscosity solutions approach is employed to carry out a finne analysis on the associated system of m variational inequalities with inter-connected obstacles. We show that the vector of value functions of the optimal problem is the unique viscosity solution to the system. This problem is in relation with the valuation of firms in a financial market

Low Mach number effect in simulation of high Mach number flow

In this note, we relate the two well-known difficulties of Godunov schemes: the carbuncle phenomena in simulating high Mach number flow, and the inaccurate pressure profile in simulating low Mach number flow. We introduced two simple low-Mach-number modifications for the classical Roe flux to decrease the difference between the acoustic and advection contributions of the numerical dissipation. While the first modification increases the local numerical dissipation, the second decreases it. The numerical tests on the double-Mach reflection problem show that both modifications eliminate the kinked Mach stem suffered by the original flux. These results suggest that, other than insufficient numerical dissipation near the shock front, the carbuncle phenomena is strongly relevant to the non-comparable acoustic and advection contributions of the numerical dissipation produced by Godunov schemes due to the low Mach number effect.Comment: 9 pages, 1 figur

G-Brownian Motion as Rough Paths and Differential Equations Driven by G-Brownian Motion

The present paper is devoted to the study of sample paths of G-Brownian motion and stochastic differential equations (SDEs) driven by G-Brownian motion from the view of rough path theory. As the starting point, we show that quasi-surely, sample paths of G-Brownian motion can be enhanced to the second level in a canonical way so that they become geometric rough paths of roughness 2 < p < 3. This result enables us to introduce the notion of rough differential equations (RDEs) driven by G-Brownian motion in the pathwise sense under the general framework of rough paths. Next we establish the fundamental relation between SDEs and RDEs driven by G-Brownian motion. As an application, we introduce the notion of SDEs on a differentiable manifold driven by GBrownian motion and construct solutions from the RDE point of view by using pathwise localization technique. This is the starting point of introducing G-Brownian motion on a Riemannian manifold, based on the idea of Eells-Elworthy-Malliavin. The last part of this paper is devoted to such construction for a wide and interesting class of G-functions whose invariant group is the orthogonal group. We also develop the Euler-Maruyama approximation for SDEs driven by G-Brownian motion of independent interest

Calculus and heat flow in metric measure spaces and applications to spaces with Ricci bounds from below

This paper is devoted to a deeper understanding of the heat flow and to the refinement of calculus tools on metric measure spaces (X,d,m). Our main results are: - A general study of the relations between the Hopf-Lax semigroup and Hamilton-Jacobi equation in metric spaces (X,d). - The equivalence of the heat flow in L^2(X,m) generated by a suitable Dirichlet energy and the Wasserstein gradient flow of the relative entropy functional in the space of probability measures P(X). - The proof of density in energy of Lipschitz functions in the Sobolev space W^{1,2}(X,d,m). - A fine and very general analysis of the differentiability properties of a large class of Kantorovich potentials, in connection with the optimal transport problem. Our results apply in particular to spaces satisfying Ricci curvature bounds in the sense of Lott & Villani [30] and Sturm [39,40], and require neither the doubling property nor the validity of the local Poincar\'e inequality.Comment: Minor typos corrected and many small improvements added. Lemma 2.4, Lemma 2.10, Prop. 5.7, Rem. 5.8, Thm. 6.3 added. Rem. 4.7, Prop. 4.8, Prop. 4.15 and Thm 4.16 augmented/reenforced. Proof of Thm. 4.16 and Lemma 9.6 simplified. Thm. 8.6 corrected. A simpler axiomatization of weak gradients, still equivalent to all other ones, has been propose

Drift dependence of optimal trade execution strategies under transient price impact

We give a complete solution to the problem of minimizing the expected liquidity costs in presence of a general drift when the underlying market impact model has linear transient price impact with exponential resilience. It turns out that this problem is well-posed only if the drift is absolutely continuous. Optimal strategies often do not exist, and when they do, they depend strongly on the derivative of the drift. Our approach uses elements from singular stochastic control, even though the problem is essentially non-Markovian due to the transience of price impact and the lack in Markovian structure of the underlying price process. As a corollary, we give a complete solution to the minimization of a certain cost-risk criterion in our setting

On arbitrages arising from honest times

In the context of a general continuous financial market model, we study whether the additional information associated with an honest time gives rise to arbitrage profits. By relying on the theory of progressive enlargement of filtrations, we explicitly show that no kind of arbitrage profit can ever be realised strictly before an honest time, while classical arbitrage opportunities can be realised exactly at an honest time as well as after an honest time. Moreover, stronger arbitrages of the first kind can only be obtained by trading as soon as an honest time occurs. We carefully study the behavior of local martingale deflators and consider no-arbitrage-type conditions weaker than NFLVR.Comment: 25 pages, revised versio

Two refreshing views of Fluctuation Theorems through Kinematics Elements and Exponential Martingale

In the context of Markov evolution, we present two original approaches to obtain Generalized Fluctuation-Dissipation Theorems (GFDT), by using the language of stochastic derivatives and by using a family of exponential martingales functionals. We show that GFDT are perturbative versions of relations verified by these exponential martingales. Along the way, we prove GFDT and Fluctuation Relations (FR) for general Markov processes, beyond the usual proof for diffusion and pure jump processes. Finally, we relate the FR to a family of backward and forward exponential martingales.Comment: 41 pages, 7 figures; version2: 45 pages, 7 figures, minor revisions, new results in Section