Robust option replication for a Black-Scholes model extended with nondeterministic trends

Statistical analysis on various stocks reveals long range dependence behavior of the stock prices that is not consistent with the classical Black and Scholes model. This memory or nondeterministic trend behavior is often seen as a reflection of market sentiments and causes that the historical volatility estimator becomes unreliable in practice. We propose an extension of the Black and Scholes model by adding a term to the original Wiener term involving a smoother process which accounts for these effects. The problem of arbitrage will be discussed. Using a generalized stochastic integration theory [8], we show that it is possible to construct a self financing replicating portfolio for a European option without any further knowledge of the extension and that, as a consequence, the classical concept of volatility needs to be re-interpreted. AMS subject classifications: 60H05, 60H10, 90A09

The CMB Dipole and Circular Galaxy Distribution

The validity of Hubble's law defies the determination of the center of the big bang expansion, even if it exists. Every point in the expanding universe looks like the center from which the rest of the universe flies away. In this article, the author shows that the distribution of apparently circular galaxies is not uniform in the sky and that there exists a special direction in the universe in our neighborhood. The data is consistent with the assumption that the tidal force due to the mass distribution around the universe center causes the deformation of galactic shapes depending on its orientation and location relative to the center and our galaxy. Moreover, the cmb dipole data can also be associated with the center of the universe expansion, if the cmb dipole at the center of our supercluster is assumed to be due to Hubble flow. The location of the center is estimated from the cmb dipole data. The direction to the center from both sets of data is consistent and the distance to the center is computed from the cmb dipole data.Comment: 9 pages, 3 figures (10 figure captions), 1 tabl

The real multiple dual

In this paper we present a dual representation for the multiple stopping problem, hence multiple exercise options. As such it is a natural generalization of the method in Rogers (2002) and Haugh and Kogan (2004) for the standard stopping problem for American options. We consider this representation as the real dual as it is solely expressed in terms of an infimum over martingales rather than an infimum over martingales and stopping times as in Meinshausen and Hambly (2004). For the multiple dual representation we present three Monte Carlo simulation algorithms which require only one degree of nesting

Calibration of LIBOR models to caps and swaptions: A way around intrinsic instabilities via parsimonious structures and a collateral market criterion

We expose an intrinsic stability problem in joint calibration of a LIBOR market model to caps and swaptions by direct least squares calibration. This problem typically encounters if one tries to identify jointly the volatility norm behaviour and the correlation structure of the forward LIBORs. As a remedy we propose collateral incorporation of a 'Market Swaption Formula', a rule-of-thumb formula which practitioners tend to use, in the calibration routine. It is shown by experiments with practical data that with this new calibration procedure and suitably parametrized volatility structures LIBOR model calibration to caps and swaptions is stable. The involved calibration routine is based on standard swaption approximation or its refinements by Hull & White, Jäckel & Rebonato. We deal with the issue of differently settled caps and swaptions by accordingly adapting the swap rate formula and give a respective modification of Jäckel and Rebonato's refined swaption approximation formula

Modeling Non-Circular Motions in Disk Galaxies: Application to NGC 2976

We present a new procedure to fit non-axisymmetric flow patterns to 2-D velocity maps of spiral galaxies. We concentrate on flows caused by bar-like or oval distortions to the total potential that may arise either from a non-axially symmetric halo or a bar in the luminous disk. We apply our method to high-quality CO and Halpha data for the nearby, low-mass spiral NGC 2976 previously obtained by Simon et al., and find that a bar-like model fits the data at least as well as their model with large radial flows. We find supporting evidence for the existence of a bar in the baryonic disk. Our model suggests that the azimuthally averaged central attraction in the inner part of this galaxy is larger than estimated by these authors. It is likely that the disk is also more massive, which will limit the increase to the allowed dark halo density. Allowance for bar-like distortions in other galaxies may either increase or decrease the estimated central attraction.Comment: 12 pages, 6 figures, accepted for publication in ApJ. v2: minor changes to match proofs. For version with high-resolution figures, see http://www.physics.rutgers.edu/~spekkens/papers/noncirc.pd

Regression on particle systems connected to mean-field SDEs with applications

In this note we consider the problem of using regression on interacting particles to compute conditional expectations for McKean-Vlasov SDEs. We prove general result on convergence of linear regression algorithms and establish the corresponding rates of convergence. Application to optimal stopping and variance reduction are considered

An iterative algorithm for multiple stopping: Convergence and stability

We present a new iterative procedure for solving the discrete multiple stopping problem and discuss the stability of the algorithm. The algorithm produces monotonically increasing approximations of the Snell envelope, which coincide with the Snell envelope after finitely many steps. Contrary to backward dynamic programming, the algorithm allows to calculate approximative solutions with only a few nestings of conditionals expectations and is, therefore, tailor-made for a plain Monte-Carlo implementation

Multilevel dual approach for pricing American style derivatives

In this article we propose a novel approach to reduce the computational complexity of the dual method for pricing American options. We consider a sequence of martingales that converges to a given target martingale and decompose the original dual representation into a sum of representations that correspond to different levels of approximation to the target martingale. By next replacing in each representation true conditional expectations with their Monte Carlo estimates, we arrive at what one may call a multilevel dual Monte Carlo algorithm. The analysis of this algorithm reveals that the computational complexity of getting the corresponding target upper bound, due to the target martingale, can be significantly reduced. In particular, it turns out that using our new approach, we may construct a multilevel version of the well-known nested Monte Carlo algorithm of Andersen and Broadie (2004) that is, regarding complexity, virtually equivalent to a non-nested algorithm. The performance of this multilevel algorithm is illustrated by a numerical example