On dynamic programming equations for utility indifference pricing under delta constraints

In this paper we study the problem of utility indifference pricing in a constrained financial market, using a utility function defined over the positive real line. We present a convex risk measure −v(•:y) satisfying q(x,F)=x+v(F:u₀(x)), where u₀(x) is the maximal expected utility of a small investor with the initial wealth x, and q(x,F) is a utility indifference buy price for a European contingent claim with a discounted payoff F. We provide a dynamic programming equation associated with the risk measure (−v), and characterize v as a viscosity solution of this equation.     

Applications of utility functions defined on quasi-metric spaces

A quasi-metric space (X,d) is called sup-separable if (X,d^s) is a separable metric space, where d^s(x,y)=max{d(x,y),d(y,x)} for all x,y∈X. We characterize those preferences, defined on a sup-separable quasi-metric space, for which there is a semi-Lipschitz utility function. We deduce from our results that several interesting examples of quasi-metric spaces which appear in different fields of theoretical computer science admit semi-Lipschitz utility functions. We also apply our methods to the study of certain kinds of dynamical systems defined on quasi-metric spaces.     

Varieties of Birkhoff Systems Part II

This is the second part of a two-part paper on Birkhoff systems. A Birkhoff system is an algebra that has two binary operations ? and + , with each being commutative, associative, and idempotent, and together satisfying x?(x + y) = x+(x?y). The first part of this paper described the lattice of subvarieties of Birkhoff systems. This second part continues the investigation of subvarieties of Birkhoff systems. The 4-element subdirectly irreducible Birkhoff systems are described, and the varieties they generate are placed in the lattice of subvarieties. The poset of varieties generated by finite splitting bichains is described. Finally, a structure theorem is given for one of the five covers of the variety of distributive Birkhoff systems, the only cover that previously had no structure theorem. This structure theorem is used to complete results from the first part of this paper describing the lower part of the lattice of subvarieties of Birkhoff systems.     

Comparing financial investments by their state dependent returns: A one-way log utility representation

In a standard single-period model under risk, we formalize and discuss an intuitive criterion for the binary comparison of financial investments. Two investments – x and y – are compared by calculating the present value of x’s payoffs using the state dependent returns of y as discount factors. The induced preference is asymmetric but exhibits intransitive indifference. If the feasible set is convex, then the criterion selects a unique maximum element. Interestingly, it can be shown that the induced preference can be represented by a one-way expected utility representation employing logarithmic utility. Besides giving a relevant and illustrative example for a one-way utility representation, this result provides a new interpretation of using logarithmic utility for expected utility based decision-making.     

Denjoy-Wolff theorems, Hilbert metric nonexpansive maps and reproduction-decimation operators

Let K be a closed cone with nonempty interior in a Banach space X. Suppose that is order-preserving and homogeneous of degree one. Let be a continuous, homogeneous of degree one map such that q(x)>0 for all x∈K?{0}. Let T(x)=f(x)/q(f(x)). We give conditions on the cone K and the map f which imply that there is a convex subset of ∂K which contains the omega limit set ω(x;T) for every x∈intK. We show that these conditions are satisfied by reproduction-decimation operators. We also prove that ω(x;T)⊂∂K for a class of operator-valued means.     

Connectivity in digraphs

Let c(x,y) denote the maximum number of edge-disjoint directed paths joining x to y in the digraph G. It is shown that, for a given point a of G, c(a,x) ≤ c(x,a) for any x implies that the outdegree of a is ≤ its indegree. An immediate consequence is Kotzig's conjecture: Given a digraph G, c(x,y) = c(y,x) for every x, y if and only if the graph is pseudo-symmetric, i.e., each point has the same indegree and outdegree (the “if” part having been proved by Kotzig). The same method is applied to prove a weakened form of a conjecture of N. Robertson, while the original conjecture is disproved.     

The diophantine equation x3 + 3y3 = 2n

It is proved that the equation of the title has a finite number of integral solutions (x, y, n) and necessary conditions are given for (x, y, n) in order that it can be a solution (Theorem 2). It is also proved that for a given odd x₀ there is at most one integral solution (y, n), n ≥ 3, to x₀³ + 3y³ = 2ⁿ and for a given odd y₀ there is at most one integral solution (x, n), n ≥ 3, to x³ + 3y₀³ = 2ⁿ.     

Economic planning based on social preference functions

We argue that the most desirable social welfare functions for practical use (here sometimes called social preference functions) are those determined by Σ_ilog(u_i(x)?α) where u_i(x) is the utility of alternative x to individual i and α is the minimum standard of living decided upon by the society.     

A splitting criterion for an isolated singularity at x = 0 in a family of even hypersurfaces

Assume given a family of even local analytic hypersurfaces, whose central fiber has an isolated singularity at x =?0 which is not an ordinary double point. We prove that if the family is sufficiently general, for instance if the general fiber is smooth and the general singular fiber has only ordinary double points, then the singularity at x = 0 “splits in codimension one”, i.e., the local discriminant divisor has an irreducible component, over which a general fiber has more than one singularity specializing to the original one. As a corollary, we deduce the result by Grushevsky and Salvati Manni (Singularities of the theta divisor at points of order two, IMRN, 2007, Proposition 8) that on a principally polarized abelian variety (A, Θ) with dim(A) = g ≥ 4, a singularity of even multiplicity on Θ, isolated or not, at a point of order two and not an ordinary double point, must be a limit of two distinct ordinary double points {x, ?x} on nearby theta divisors.     

Degenerate Evolution Equations in Weighted Continuous Function Spaces, Markov Processes and the Black-Scholes Equation-Part II

In this second part of the paper, through applying semigroup theory procedures, we study initial boundary problems associated with degenerate second-order differential operators of the form Lu(x) ? α(x) u″(x)+β(x)u′(x)+γ(x) u(x) in the framework of weighted continuous function spaces on an arbitrary real interval, when particular boundary conditions are imposed. By using the general results stated in the first part, we show that such operators, frequently occurring in Mathematical Finance, generate positive strongly continuous semigroups, which are, in turn, the transition semigroups associated with suitable Markov processes. Finally, an application to the Black-Scholes equation is discussed, as well.     

Random expected utility theory with a continuum of prizes

This note generalizes Gul and Pesendorfer’s random expected utility theory, a stochastic reformulation of von Neumann–Morgenstern expected utility theory for lotteries over a finite set of prizes, to the circumstances with a continuum of prizes. Let [0, M] denote this continuum of prizes; assume that each utility function is continuous, let \(C_0[0,M]\) be the set of all utility functions which vanish at the origin, and define a random utility function to be a finitely additive probability measure on \(C_0[0,M]\) (associated with an appropriate algebra). It is shown here that a random choice rule is mixture continuous, monotone, linear, and extreme if, and only if, the random choice rule maximizes some regular random utility function. To obtain countable additivity of the random utility function, we further restrict our consideration to those utility functions that are continuously differentiable on [0, M] and vanish at zero. With this restriction, it is shown that a random choice rule is continuous, monotone, linear, and extreme if, and only if, it maximizes some regular, countably additive random utility function. This generalization enables us to make a discussion of risk aversion in the framework of random expected utility theory.     

On the sum-of-ranks winner when losers are removed

Suppose that m alternatives are linearly ranked from best to worst by each of a number of judges, and that alternative x is the unique winner on the sum-of-ranks basis. It is shown that it is possible to construct a situation (with an appropriate number of judges) such that the initial winner x will be a sum-of-ranks loser within every proper subset of the original set of alternatives that contains x and at least one other alternative, except that x is the winner in exactly one subset that contains x and one other alternative.     

Complexities of Winning Strategies in Diophantine Games

This paper considers the computational complexity of computing winning strategies in diophantine games, where two players take turns choosing natural numbers x₁, x₂, x₃, . . . , x_n and the win condition is a polynomial equation in the variables x₁, x₂, . . . , x_n. A diophantine game G₄ of length 4 is constructed with the propertythat neither player has a polynomial time computable winning strategy. Also a diophantine game G₆ of length 6 is constructed with the property that one of the players has a polynomial time computable winning strategy in G₆ iff P = NP. Finally a diophantine game N_b of length 6 is constructed such that one of the players has a polynomial time computable winning strategy in it iff co-NP = NP.     

Prospective teachers’ reactions to Right-or-Wrong tasks: The case of derivatives of absolute value functions

This paper illustrates the role of a Thinking-about-Derivatives task in identifying learners’ derivative conceptions and for promoting their critical thinking about derivatives of absolute value functions. The task included three parts: Define the derivative of a function f(x) at x = x_0,Solve-if-Possible the derivative of f(x) = |x| at x = 2 and at x = 0, and evaluate the correctness of suggested solutions in a Right-or-Wrong part. Three prospective teachers, Noa, Anat and Daniel were individually interviewed when solving the task. We found that while the participants correctly solved the Define part, they exhibited some erroneous images in the Solve-if-Possible part, and their work on the Right-or-Wrong part contributed to their critical thinking about functions and derivatives. All three participants expressed their appreciation of their work on the Right-or-Wrong part of the task.     

Conley index of nontrivial invariant sets in a Hilbert space

We study flows defined in a Hilbert space by potential completely continuous fields Id-K(·), where K(·) is an operator close to a homogeneous one. The Conley index of the set of fixed points and separatrices joining them (a nontrivial invariant set) is defined for such flows. By using this index, we prove that the equation K(x) = x has infinitely many solutions of arbitrarily large norm provided that the potential φ: ?φ(·) = K(·) is coercive and has an even leading part. As a corollary, we justify the stability of an arbitrary finite number of solutions under small perturbations of the field. We show that the Conley index differs from the classical rotation theory of vector fields when proving existence theorems.     

On difference polynomials and hereditarily irreducible polynomials

A difference polynomial is one of the form P(x, y) = p(x) ? q(y). Another proof is given of the fact that every difference polynomial has a connected zero set, and this theorem is applied to give an irreducibility criterion for difference polynomials. Some earlier problems about hereditarily irreducible polynomials (HIPs) are solved. For example, P(x, y) is called a HIP (two-variable case) if P(a(x), b(y)) is always irreducible, and it is shown that such two-variable HIPs actually exist.     

Asymptotic equipartition and long time behavior of solutions of a thin-film equation

We investigate the large-time behavior of classical solutions to the thin-film type equation ut=−x(uuxxx). It was shown in previous work of Carrillo and Toscani that for non-negative initial data u₀ that belongs to H¹(R) and also has a finite mass and second moment, the strong solutions relax in the L¹(R) norm at an explicit rate to the unique self-similar source type solution with the same mass. The equation itself is gradient flow for an energy functional that controls the H¹(R) norm, and so it is natural to expect that one should also have convergence in this norm. Carrillo and Toscani raised this question, but their methods, using a different Lyapunov functions that arises in the theory of the porous medium equation, do not directly address this since their Lyapunov functional does not involve derivatives of u. Here we show that the solutions do indeed converge in the H¹(R) norm at an explicit, but slow, rate. The key to establishing this convergence is an asymptotic equipartition of the excess energy. Roughly speaking, the energy functional whose dissipation drives the evolution through gradient flow consists of two parts: one involving derivatives of u, and one that does not. We show that these must decay at related rates—due to the asymptotic equipartition—and then use the results of Carrillo and Toscani to control the rate for the part that does not depend on derivatives. From this, one gets a rate on the dissipation for all of the excess energy.     

The nonbifurcation of periodic solutions when the variational matrix has a zero eigenvalue

It is assumed that the variational matrix of the 2-dimensional system x′ = F(x, ?) has at least one zero eigenvalue rather than the usual Hopf assumption of two conjugate pure imaginary eigenvalues. It is then shown that genetically, although one may expect a bifurcation of stationary solutions, a bifurcation of periodic solutions will not occur.     

Optimal Pricing for Optimal Transport

Suppose that c(x, y) is the cost of transporting a unit of mass from x ∈ X to y ∈ Y and suppose that a mass distribution μ on X is transported optimally (so that the total cost of transportation is minimal) to the mass distribution ν on Y. Then, roughly speaking, the Kantorovich duality theorem asserts that there is a price f(x) for a unit of mass sold (say by the producer to the distributor) at x and a price g(y) for a unit of mass sold (say by the distributor to the end consumer) at y such that for any x ∈ X and y ∈ Y, the price difference g(y) ? f(x) is not greater than the cost of transportation c(x, y) and such that there is equality g(y) ? f(x) = c(x, y) if indeed a nonzero mass was transported (via the optimal transportation plan) from x to y. We consider the following optimal pricing problem: suppose that a new pricing policy is to be determined while keeping a part of the optimal transportation plan fixed and, in addition, some prices at the sources of this part are also kept fixed. From the producers’ side, what would then be the highest compatible pricing policy possible? From the consumers’ side, what would then be the lowest compatible pricing policy possible? We have recently introduced and studied settings in c-convexity theory which gave rise to families of c-convex c-antiderivatives, and, in particular, we established the existence of optimal c-convex c-antiderivatives and explicit constructions of these optimizers were presented. In applications, it has turned out that this is a unifying language for phenomena in analysis which used to be considered quite apart. In the present paper we employ optimal c-convex c-antiderivatives and conclude that these are natural solutions to the optimal pricing problems mentioned above. This type of problems drew attention in the past and existence results were previously established in the case where X = Y = ? ⁿ under various specifications. We solve the above problem for general spaces X, Y and real-valued, lower semicontinuous cost functions c. Furthermore, an explicit construction of solutions to the general problem is presented.