Dynamic option pricing with endogenous stochastic arbitrage

Only few efforts have been made in order to relax one of the key assumptions of the Black-Scholes model: the no-arbitrage assumption. This is despite the fact that arbitrage processes usually exist in the real world, even though they tend to be short-lived. The purpose of this paper is to develop an option pricing model with endogenous stochastic arbitrage, capable of modelling in a general fashion any future and underlying asset that deviate itself from its market equilibrium. Thus, this investigation calibrates empirically the arbitrage on the futures on the S&P 500 index using transaction data from September 1997 to June 2009, from here a specific type of arbitrage called “arbitrage bubble”, based on a t-step function, is identified and hence used in our model. The theoretical results obtained for Binary and European call options, for this kind of arbitrage, show that an investment strategy that takes advantage of the identified arbitrage possibility can be defined, whenever it is possible to anticipate in relative terms the amplitude and timespan of the process. Finally, the new trajectory of the stock price is analytically estimated for a specific case of arbitrage and some numerical illustrations are developed. We find that the consequences of a finite and small endogenous arbitrage not only change the trajectory of the asset price during the period when it started, but also after the arbitrage bubble has already gone. In this context, our model will allow us to calibrate the B-S model to that new trajectory even when the arbitrage already started.     

Quantum wave processing

In recent years, the concept of quantum computing has arisen as a methodology by which very rapid computations can be achieved. In general, the ‘speed’ of these computations is compared to that of (classical) digital computers, which use sequential algorithms. However, in most quantum computing approaches, the qubits themselves are treated as analog objects. One then needs to ask whether this computational speed-up of the computation is a result of the quantum mechanics, or whether it is due to the nature of the analog structures that are being ‘generated’ for quantum computation? In this paper, we will make two points: (1) quantum computation utilizes analog, parallel computation which often offers no speed advantage over classical computers which are implemented using analog, parallel computation; (2) once this is realized, then there is little advantage in projecting the quantum computation onto the pseudo-binary construct of a qubit. Rather, it becomes more effective to seek the equivalent wave processing that is inherent in the analog, parallel processing. We will examine some wave processing systems which may be useful for quantum computation.     

The First-Quantized Theory of Photons

In near-field optics and optical tunnelling theory, photon wave mechanics, i.e. the first-quantized theory of photons, allows us to address the spatial field localization problem in a flexible manner which links smoothly to classical electromagnetics. We develop photon wave mechanics in a rigorous and unified way, based on which field quantization is obtained in a new way.     

A quantum model of option pricing: When Black-Scholes meets Schrödinger and its semi-classical limit

The Black-Scholes equation can be interpreted from the point of view of quantum mechanics, as the imaginary time Schrödinger equation of a free particle. When deviations of this state of equilibrium are considered, as a product of some market imperfection, such as: Transaction cost, asymmetric information issues, short-term volatility, extreme discontinuities, or serial correlations; the classical non-arbitrage assumption of the Black-Scholes model is violated, implying a non-risk-free portfolio. From Haven (2002) [1] we know that an arbitrage environment is a necessary condition to embedding the Black-Scholes option pricing model in a more general quantum physics setting. The aim of this paper is to propose a new Black-Scholes-Schrödinger model based on the endogenous arbitrage option pricing formulation introduced by Contreras et al. (2010) [2]. Hence, we derive a more general quantum model of option pricing, that incorporates arbitrage as an external time dependent force, which has an associated potential related to the random dynamic of the underlying asset price. This new resultant model can be interpreted as a Schrödinger equation in imaginary time for a particle of mass 1/σ² with a wave function in an external field force generated by the arbitrage potential. As pointed out above, this new model can be seen as a more general formulation, where the perfect market equilibrium state postulated by the Black-Scholes model represent a particular case. Finally, since the Schrödinger equation is in place, we can apply semiclassical methods, of common use in theoretical physics, to find an approximate analytical solution of the Black-Scholes equation in the presence of market imperfections, as it is the case of an arbitrage bubble. Here, as a numerical illustration of the potential of this Schrödinger equation analogy, the semiclassical approximation is performed for different arbitrage bubble forms (step, linear and parabolic) and compare with the exact solution of our general quantum model of option pricing.     

A quantile-based Time at Risk: A new approach for assessing risk in financial markets

In this paper, we provide a new measure for evaluation of risk in financial markets. This measure is based on the return interval of critical events in financial markets or other investment situations. Our main goal was to devise a model like Value at Risk (VaR). As VaR, for a given financial asset, probability level and time horizon, gives a critical value such that the likelihood of loss on the asset over the time horizon exceeds this value is equal to the given probability level, our concept of Time at Risk (TaR), using a probability distribution function of return intervals, provides a critical time such that the probability that the return interval of a critical event exceeds this time equals the given probability level. As an empirical application, we applied our model to data from the Tehran Stock Exchange Price Index (TEPIX) as a financial asset (market portfolio) and reported the results.     

Arbitrage opportunities and their implications to derivative hedging

We explore the role that random arbitrage opportunities play in hedging financial derivatives. We extend the asymptotic pricing theory presented by Fedotov and Panayides [Stochastic arbitrage return and its implication for option pricing, Physica A 345 (2005) 207–217] for the case of hedging a derivative when arbitrage opportunities are present in the market. We restrict ourselves to finding hedging confidence intervals that can be adapted to the amount of arbitrage risk an investor will permit to be exposed to. The resulting hedging bands are independent of the detailed statistical characteristics of the arbitrage opportunities.     

The Variation of Financial Arbitrage via the Use of an Information Wave Function

We define an ‘information wave function’, Ψ(q). We underline the role of risk-neutral probabilities in financial non-arbitrage. We argue how a change in the probabilities based on Ψ(q) can induce arbitrage.     

Stochastic arbitrage return and its implication for option pricing

The purpose of this work is to explore the role that random arbitrage opportunities play in pricing financial derivatives. We use a non-equilibrium model to set up a stochastic portfolio, and for the random arbitrage return, we choose a stationary ergodic random process rapidly varying in time. We exploit the fact that option price and random arbitrage returns change on different time scales which allows us to develop an asymptotic pricing theory involving the central limit theorem for random processes. We restrict ourselves to finding pricing bands for options rather than exact prices. The resulting pricing bands are shown to be independent of the detailed statistical characteristics of the arbitrage return. We find that the volatility “smile” can also be explained in terms of random arbitrage opportunities.     

Application of Bohmian Mechanics to Dynamics of Prices of Shares: Stochastic Model of Bohm–Vigier from Properties of Price Trajectories

We propose to describe behavioral financial factors (e.g., expectations of traders) by using the pilot wave (Bohmian) model of quantum mechanics. Through comparing properties of trajectories we come to the conclusion that the only possibility to proceed with real financial data is to apply the stochastic version of the pilot wave theory—the model of Bohm–Vigier.     

Thermodynamic Gravity and the Schrödinger Equation

We adopt a formulation of the Mach principle that the rest mass of a particle is a measure of it’s long-range collective interactions with all other particles inside the horizon. As a consequence, all particles in the universe form a ‘gravitationally entangled’ statistical ensemble and one can apply the approach of classical statistical mechanics to it. It is shown that both the Schrödinger equation and the Planck constant can be derived within this Machian model of the universe. The appearance of probabilities, complex wave functions, and quantization conditions is related to the discreetness and finiteness of the Machian ensemble.     

Erzwingt die Quantenmechanik eine drastische Änderung unseres Weltbilds? Gedanken und Experimente nach Einstein,Podolsky und Rosen

Do Quantum Mechanics Force us to Drastically Change our View of the World? Thoughts and Experiments after Einstein, Podolsky and Rosen Since the advent of quantum mechanics there have been attempts of its interpretation in terms of statistical theory concerning individual ‘classical’ systems. The very conditions necessary to consider hidden variable theories describing these individual systems as ‘classical’ had been pointed out by Einstein, Podolsky and Rosen in 1935: 1. Physical systems are in principle separable. 2. If it is possible to predict with certainty the value of a physical quantity without disturbing the system under consideration, then there exists an element of physical reality corresponding to this physical quantity. Together they are, as was shown by Bell in 1964, incompatible in principle with quantum mechanics and no more tenable in view of recent experiments. These experiments once more corroborate quantum theory. In order to understand their results we are forced either to drop the assumption of separability of physical systems (taken for self-evident in classical physics) or to change our concept of physical reality. After investigating the notion of separability and connecting the ‘EPR-correlations’ to the measurement problem we, conclude that a change of the concept of physical reality is indispensable. The revised concept should be compatible with both classical and quantum physics in order to allow a uniform view of the physical world.     

Statistical mechanics and financial markets: Antagony between derivatives and market self-regulation

We establish specific correspondences between notions of economics and statistical mechanics. There are several situations wherein a rather accurate correspondence has already been established, for instance in utility theory for exchange economy with quasilinear utility function, which has been mapped to analogous thermodynamics. We discuss how statistical mechanics can be applied to define the efficiency of financial markets, via a mapping of stock fluctuations to the Random Energy Model (REM) at particular temperatures. We introduce the concept of reflection in economics; the effective reflection number, in particular, is found to be crucial in understanding the self-regulation of the market. We also establish a qualitative similarity between market with derivatives and certain statistical mechanics models. Such an analogy supports a hypothesis that financial derivatives are antagonistic to the self-regulation of financial markets. As a whole, our analysis is complementary to established concepts and methods of neoclassical economics for markets without derivatives.     

The nature of the liquid-vapour interface and other topics in the statistical mechanics of non-uniform,classical fluids

Recent theoretical work on the microscopic structure and surface tension of the liquid-vapour interface of simple (argon-like) fluids is critically reviewed. In particular, the form of pairwise intermolecular correlations in the liquid surface and the capillary wave treatment of the interface are examined in some detail. It is argued that conventional capillary wave theory, which leads to divergences in the width of the density profile, is unsatisfactory for describing all the equilibrium aspects of the interface. The density functional formalism which has been developed to study the liquid-vapour interface can also be profitably applied to other problems in the statistical mechanics of non-uniform fluids; here a new generalization of the ‘linear’ theory of spinodal decomposition is formulated and by considering a ‘nearly uniform’ fluid, some useful results for the long-wavelength behaviour of the liquid structure factor of various monatomic liquids are obtained. Some other topics of current interest in this area are briefly discussed.     

Cloaks,editors, and bubbles: applications of spacetime transformation theory

Spacetime or ‘event’ cloaking was recently introduced as a concept, and the theoretical design for such a cloak was presented for illumination by electromagnetic waves [McCall et al., J. Opt. 2011]. Here it is described how event cloaks can be designed for simple wave systems, using either an approximate ‘speed cloak’ method, or an exact full‐wave one. Further, details of many of the implications of spacetime transformation devices are discussed, including their (usually) directional nature, spacetime distortions (as opposed to cloaks), and how leaky cloaks manifest themselves. More exotic concepts are also addressed, in particular concepts that follow naturally on from considerations of simple spacetime transformation devices, such as spacetime modeling and causality editors. A proposal for implementing an interrupt‐without‐interrupt concept is described. Finally, the design for a time‐dependent ‘bubbleverse’ is presented, based on temporally modulated Maxwell's Fisheye transformation device (T‐device) in a flat background spacetime.     

Josephson (001) tilt grain boundary junctions of high-temperature superconductors

We calculate the Josephson critical current I_c across in-plane (001) tilt grain boundary junctions of high-temperature superconductors. We solve for the electronic states corresponding to the electron-doped cuprates, two slightly different hole-doped cuprates, and an extremely underdoped hole-doped cuprate in each half-space, and weakly connect the two half-spaces by either specular or random Josephson tunnelling. We treat symmetric, straight, and fully asymmetric junctions with s-, extended-s, or d _{x ²?y ²} -wave order parameters. For symmetric junctions with random grain boundary tunnelling, our results are generally in agreement with the Sigrist–Rice form for ideal junctions that has been used to interpret ‘phase-sensitive’ experiments consisting of such in-plane grain boundary junctions. For specular grain boundary tunnelling across symmetric junctions, our results depend upon the Fermi surface topology, but are usually rather consistent with the random facet model of Tsuei et al. Our results for asymmetric junctions of electron-doped cuprates are in agreement with the Sigrist–Rice form. However, our results for asymmetric junctions of hole-doped cuprates show that the details of the Fermi surface topology and of the tunnelling processes are both very important, so that the ‘phase-sensitive’ experiments based upon in-plane Josephson junctions are less definitive than has generally been thought.     

对流扩散方程的指数型摄动差分法

改进了作者所提出的对流扩散方程四阶指数型摄动差分格式,并阐明其在高Reynolds数适应性和节省计算量方面的显著优点。指数型摄动差分法经改进后具有较为简便的形式,克服了其他紧致高阶格式不能使用于高Reynolds数问题的致命弱点。文中针对计算流体力学的基本困难,作一至三维流动模型方程和自然对流传热问题的精细计算,且以双精制算法检验格式的四阶精度,表明摄动差分法能在较粗的网格下给出相当准确的结果,十分显著地节省计算机时,并对"激波"和"边界层"等高Reynolds数效应有极高的分辨能力。     

Remote projection and quantum mirages in STS and STM

The phenomena of remote projection and quantum mirages are investigated using standard quantum mechanics. The information inherent in delocalized wave functions in the vicinity of the Fermi level, including contributions from localized states, is available wherever the waves propagate coherently and have a non-vanishing amplitude and therefore can be probed remotely. This can explain the observation of a "quantum mirage" by Manoharan et al.: Nature 403, 512 (2000), i.e., the Kondo antiresonance due to a single adsorbed Co atom on Cu (111) far from the location of the cobalt atom. Similar quantum effects can give rise to "mirage" features in the scanning tunnelling spectrum (STS) both on clean and adsorbate-covered metal surfaces, features which are not resolved in other surface-sensitive spectroscopies (IPES, 2PPE). Within a theory based on a many-particle treatment of the tunnelling phenomena in STS and in scanning tunnelling microscopy (STM), the unexpected features in the scanning tunnelling spectra are associated with the spectral weight of transient ion-resonance states generated in the process of electron injection. They transport in a coherent way the information from the tip towards the sample and vice versa over distances of the order of 10 Å or more, generating spectroscopic structures. These "mirage" states are important for the tunnelling current and the imaging properties.     

Beyond Black-Scholes: semimartingales and Lévy processes for option pricing

We consider the problem of option pricing when the underlying asset follows a general semimartingale process. After reviewing the foundations of arbitrage pricing theory for semimartingales and the link with Lévy processes, we introduce a general method to price options in this framework based on Fourier and Wavelet analysis. Received 4 September 2000     

Nonstandard electrostatic problem for strips

The spatial field distribution is the most frequent subject of standard electrostatic analysis. In this paper the system of several strips in external spatial-harmonic electric field, which causes the charge distribution on them, is considered. The solution is constructed as a linear combination of certain template functions, evaluated in spectral domain and satisfying the electric boundary conditions on the strips. The problem is analogous to wave scattering; this justifies the application of the wave-scattering terminology (i.e. incident wave for the external field and the corresponding ‘radiation condition’) in the considered nonstandard ‘electrostatic scattering’ problem. The strip total charge and the Bloch harmonics of the ‘scattered’ field are evaluated.