Black-Scholes Formula in Subdiffusive Regime

In the classical approach the price of an asset is described by the celebrated Black-Scholes model. In this paper we consider a generalization of this model, which captures the subdiffusive characteristics of financial markets. We introduce a subdiffusive geometric Brownian motion as a model of asset prices exhibiting subdiffusive dynamics. We find the corresponding fractional Fokker-Planck equation governing the dynamics of the probability density function of the introduced process. We prove that the considered model is arbitrage-free and incomplete. We find the corresponding subdiffusive Black-Scholes formula for the fair prices of European options and show how these prices can be evaluated using Monte-Carlo methods. We compare the obtained results with the classical ones.     

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.     

Pricing bounds for discrete arithmetic Asian options under Lévy models

Analytical bounds for Asian options are almost exclusively available in the Black-Scholes framework. In this paper we derive bounds for the price of a discretely monitored arithmetic Asian option when the underlying asset follows an arbitrary Lévy process. Explicit formulas are given for Kou’s model, Merton’s model, the normal inverse Gaussian model, the CGMY model and the variance gamma model. The results are compared with the comonotonic upper bound, existing numerical results, Monte carlo simulations and in the case of the variance gamma model with an existing lower bound. The method outlined here provides lower and upper bounds that are quick to evaluate, and more accurate than existing bounds.     

Fourth Order Compact Boundary Value Method for Option Pricing with Jumps

We consider pricing options in a jump-diffusion model which requires solving a partial integro-differential equation. Discretizing the spatial direction with a fourth order compact scheme leads to a linear system of ordinary differential equations. For the temporal direction, we utilize the favorable boundary value methods owing to their advantageous stability properties. In addition, the resulting large sparse system can be solved rapidly by the GMRES method with a circulant Strang-type preconditioner. Numerical results demonstrate the high order accuracy of our scheme and the efficiency of the preconditioned GMRES method.     

美式回望期权定价问题的有限体积法

随着金融市场的不断发展, 期权作为一种能够规避风险的金融衍生产品越来越引起投资者的青睐, 成交量呈逐年上升的趋势, 期权定价问题已经成为金融数学领域中一个重要的研究课题. 本文主要研究Black-Scholes模型下美式回望期权定价问题的数值解法. 美式回望期权定价问题是一个二维非线性抛物问题, 难以直接应用数值方法进行求解. 通过分析该问题的求解难点, 本文给出解决该困难的有效方法. 首先利用计价单位变换将定价问题转换为一维自由边值问题, 并采用Landau's变换将求解区域规范化; 而后针对问题的非线性特点,利用有限体积法和Newton法交替迭代求解期权价格和最佳实施边界, 并对数值解的非负性进行了分析. 最后, 通过与二叉树方法进行比较, 验证了本文方法的正确性和有效性, 为实际应用提供了理论基础.     

波动方程基于自然边界归化的区域分解算法

提出了无界区域波动方程的区域分解算法,基于自然边界归化,分别研究了重叠型与非重叠型区域分解算法,首先将控制方程对时间进行离散化,得到关于时间步长离散化格式,对每一时间步长给出了Dirichlet-Neumann和Schwartz交替算法,对Schwartz交替算法,给出了算法的收敛性,对圆外区域研究了压缩因子,并给出了数值例子。     

Modelling and Numerical Valuation of Power Derivatives in Energy Markets

In this work we investigate the pricing of swing options in a model where the underlying asset follows a jump diffusion process. We focus on the derivation of the partial integro-differential equation (PIDE) which will be applied to swing contracts and construct a novel pay-off function from a tree-based pay-off matrix that can be used as initial condition in the PIDE formulation. For valuing swing type derivatives we develop a theta implicit-explicit finite difference scheme to discretize the PIDE using a Gaussian quadrature method for the integral part. Based on known results for the classical theta-method the existence and uniqueness of solution to the new implicit-explicit finite difference method is proven. Various numerical examples illustrate the usability of the proposed method and allow us to analyse the sensitivity of swing options with respect to model parameters. In particular, the effects of number of exercise rights, jump intensities and dividend yields will be investigated in depth.     

Symmetry Breaking for Black-Scholes Equations

Black-Scholes equation is used to model stock option pricing. In this paper, optimal systems with one to four parameters of Lie point symmetries for Black-Scholes equation and its extension are obtained. Their symmetry breaking interaction associated with the optimal systems is also studied. As a result, symmetry reductions and corresponding solutions for the resulting equations are obtained.     

Generalized pricing formulas for stochastic volatility jump diffusion models applied to the exponential Vasicek model

Path integral techniques for the pricing of financial options are mostly based on models that can be recast in terms of a Fokker-Planck differential equation and that, consequently, neglect jumps and only describe drift and diffusion. We present a method to adapt formulas for both the path-integral propagators and the option prices themselves, so that jump processes are taken into account in conjunction with the usual drift and diffusion terms. In particular, we focus on stochastic volatility models, such as the exponential Vasicek model, and extend the pricing formulas and propagator of this model to incorporate jump diffusion with a given jump size distribution. This model is of importance to include non-Gaussian fluctuations beyond the Black-Scholes model, and moreover yields a lognormal distribution of the volatilities, in agreement with results from superstatistical analysis. The results obtained in the present formalism are checked with Monte Carlo simulations.     

Generalized heat diffusion equations with variable coefficients and their fractalization from the Black-Scholes equation

In this study, we prove that modified diffusion equations, including the generalized Burgers' equation with variable coefficients, can be derived from the Black-Scholes equation with a time-dependent parameter based on the propagator method known in quantum and statistical physics.The extension for the case of a local fractal derivative is also addressed and analyzed.     

Relativistic bound-state equations for fermions with instantaneous interactions

In thispaper three types of relativistic bound-state equations for a fermion pair with instantaneous interaction are studied, viz., the instantaneous Bethe-Salpeter equation, the quasi-potential equation, and the two-particle Dirac equation. General forms for the equations describing bound states with arbitrary spin, parity, and charge parity are derived. For the special case of spinless states bound by interactions with a Coulomb-type potential the properties of the ground-state solutions of the three equations are investigated both analytically and numerically. The coupling-constant spectrum turns out to depend strongly on the spinor structure of the fermion interaction. If the latter is chosen such that the nonrelativistic limits of the equations coincide, an analogous spectrum is found for the instantaneous Bethe-Salpeter and the quasi-potential equations, whereas the two-particle Dirac equation yields qualitatively different results.     

Higgs portal,fermionic dark matter,and a Standard Model like Higgs at 125 GeV

We show that fermionic dark matter (DM) which communicates with the Standard Model (SM) via the Higgs portal is a viable scenario, even if a SM-like Higgs is found at around 125 GeV. Using effective field theory we show that for DM with a mass in the range from about 60 GeV to 2 TeV the Higgs portal needs to be parity violating in order to be in agreement with direct detection searches. For parity conserving interactions we identify two distinct options that remain viable: a resonant Higgs portal, and an indirect Higgs portal. We illustrate both possibilities using a simple renormalizable toy model.     

Nondissipative and energy-stable high-order finite-difference interface schemes for 2-D patch-refined grids

A class of finite-difference interface schemes suitable for two-dimensional cell-centered grids with patch-refinement and step-changes in resolution is presented. Grids of this type are generated by adaptive mesh refinement methods according to resolution needs dictated by the physics of the problem being modeled. For these grids, coarse and fine nodes are not aligned at the mesh interfaces, resulting in hanging nodes. Three distinct geometries are identified at the interfaces of a domain with interior patch-refinement: edges, concave corners and convex corners. Asymptotic stability in time of the numerical scheme is achieved by imposing a summation-by-parts condition on the interface closure, which is thus also nondissipative. Interface stencils corresponding to an explicit fourth-order finite-difference scheme are presented for each geometry. To preserve stability, a reduction in local accuracy is required at the corner geometries. It is also found that no second-order accurate solution exists that satisfies the summation-by-parts condition. Tests using the 2-D scalar advection equation and an inviscid compressible vortex support the stability and accuracy of these stencils for both linear and nonlinear problems.     

Quantum interferometer with two-mode squeezed vacuum:_z~2 measurement

Quantum interferometric strategy with input two-mode squeezed vacuum[Phys.Rev.Lett.104 103602]is reexamined for both parity and S_z~2 measurements.Unlike the previous scheme,we find that phase sensitivity obtained with the S_z~2 measurement is minimized at phase origin,which may be useful to estimate a small phase shift at high precision.For the phase deviated from zero,the sensitivity increases more slowly than that of the parity detection.     

适应强扭曲网格的扩散方程时空二阶精度计算

以全局支撑算子方法为基础,通过引入面通量,构造了具有局部模板点的时空二阶精度格式。对于大变形扭曲网格,格式采用法向修正技术和合理的单元角体积计算方法,可以保持通量的精确性。算例表明该格式在非凸网格上能够精确获得线性解; 在非光滑网格上可以达到时空二阶精度; 能够较好地保持对称性; 并适合于三维非结构网格上的求解。     

Numerical solutions of matrix Riccati equations for radiative transfer in a plane-parallel geometry

Abstract

In this paper, we conduct numerical experiments with matrix Riccati equations (MREs) which describe the reflection (R) and transmission (T) matrices of the specific intensities in a layer containing randomly distributed scattering particles. The theoretical formulation of MREs is discussed in our previous paper where we show that R and T for a thick layer can be efficiently computed by successively doubling R and T matrices for a thin layer (with small optical thickness τ_Δ). We can compute R(τ_Δ) and T(τ_Δ) very accurately using either a fourth-order Runge–Kutta scheme or the fourth-order iterative solution. The differences between these results and those computed by the eigenmode expansion technique (EMET) are very small (<0.1%). Although the MRE formulation cannot be extended to handle the inhomogeneous term (source term) in the differential equation, we show that the force term can be reformulated as an equivalent boundary condition which is consistent with MRE methods. MRE methods offer an alternative way of solving plane-parallel radiative transport problems. For large problems that do not fit into computer memory, the MRE method provides a significant reduction in computer memory and computational time.     

A fully second order implicit/explicit time integration technique for hydrodynamics plus nonlinear heat conduction problems

We present a fully second order implicit/explicit time integration technique for solving hydrodynamics coupled with nonlinear heat conduction problems. The idea is to hybridize an implicit and an explicit discretization in such a way to achieve second order time convergent calculations. In this scope, the hydrodynamics equations are discretized explicitly making use of the capability of well-understood explicit schemes. On the other hand, the nonlinear heat conduction is solved implicitly. Such methods are often referred to as IMEX methods [2], [1], [3]. The Jacobian-Free Newton Krylov (JFNK) method (e.g. [10], [9]) is applied to the problem in such a way as to render a nonlinearly iterated IMEX method. We solve three test problems in order to validate the numerical order of the scheme. For each test, we established second order time convergence. We support these numerical results with a modified equation analysis (MEA) [21], [20]. The set of equations studied here constitute a base model for radiation hydrodynamics.     

Computationally efficient solution to the Cahn–Hilliard equation: Adaptive implicit time schemes,mesh sensitivity analysis and the 3D isoperimetric problem

We present an efficient numerical framework for analyzing spinodal decomposition described by the Cahn–Hilliard equation. We focus on the analysis of various implicit time schemes for two and three dimensional problems. We demonstrate that significant computational gains can be obtained by applying embedded, higher order Runge–Kutta methods in a time adaptive setting. This allows accessing time-scales that vary by five orders of magnitude. In addition, we also formulate a set of test problems that isolate each of the sub-processes involved in spinodal decomposition: interface creation and bulky phase coarsening. We analyze the error fluctuations using these test problems on the split form of the Cahn–Hilliard equation solved using the finite element method with basis functions of different orders. Any scheme that ensures at least four elements per interface satisfactorily captures both sub-processes. Our findings show that linear basis functions have superior error-to-cost properties.     

One Step to Generate Cluster States Using Dipole-Induced Transparency in a Cavity-Waveguide System

We present a very simple scheme for generating four-qubit cluster states with one step using parity measurement based on dipole-induced transparency in a cavity-waveguide system. The scheme only uses the photon detectors to check the parity of the spatially separated dipole, which are the same (even parity) or different (odd parity) through measuring the light fields in the waveguide. The initial entangled states remain after nondetective identification and they can be used for successive tasks.