Gauge invariant lattice quantum field theory: Implications for statistical properties of high frequency financial markets

We report on initial studies of a quantum field theory defined on a lattice with multi-ladder geometry and the dilation group as a local gauge symmetry. The model is relevant in the cross-disciplinary area of econophysics. A corresponding proposal by Ilinski aimed at gauge modeling in non-equilibrium pricing is implemented in a numerical simulation. We arrive at a probability distribution of relative gains which matches the high frequency historical data of the NASDAQ stock exchange index.     

Stochastic relaxational dynamics applied to finance: Towards non-equilibrium option pricing theory

Non-equilibrium phenomena occur not only in the physical world, but also in finance. In this work, stochastic relaxational dynamics (together with path integrals) is applied to option pricing theory. Equilibrium in financial markets is defined as the absence of arbitrage, i.e. profits “for nothing”. A recently proposed model (by Ilinski et al.) considers fluctuations around this equilibrium state by introducing a relaxational dynamics with random noise for intermediate deviations called “virtual” arbitrage returns. In this work, the model is incorporated within a martingale pricing method for derivatives on securities (e.g. stocks) in incomplete markets using a mapping to option pricing theory with stochastic interest rates. The arbitrage return is considered as a component of a fictitious short-term interest rate in a virtual world. The influence of intermediate arbitrage returns on the price of derivatives in the real world can be recovered by performing an average over the (non-observable) arbitrage return at the time of pricing. Using a famous result by Merton and with some help from the path integral method, exact pricing formulas for European call and put options under the influence of virtual arbitrage returns (or intermediate deviations from economic equilibrium) are derived where only the final integration over initial arbitrage returns needs to be performed numerically. This result, which has not been given previously and is at variance with results stated by Ilinski et al., is complemented by a discussion of the hedging strategy associated to a derivative, which replicates the final payoff but turns out to be not self-financing in the real world, but self-financing when summed over the derivative's remaining life time. Numerical examples are given which underline the fact that an additional positive risk premium (with respect to the Black-Scholes values) is found reflecting extra hedging costs due to intermediate deviations from economic equilibrium. Received 16 June 1999 and Received in final form 26 September 1999     

Spectral flow invariants and twisted cyclic theory for the Haar state on

In [A.L. Carey, J. Phillips, A. Rennie, Twisted cyclic theory and an index theory for the gauge invariant KMS state on Cuntz algebras. arXiv:0801.4605], we presented a K-theoretic approach to finding invariants of algebras with no non-trivial traces. This paper presents a new example that is more typical of the generic situation. This is the case of an algebra that admits only non-faithful traces, namely SU_q(2) and also KMS states. Our main results are index theorems (which calculate spectral flow), one using ordinary cyclic cohomology and the other using twisted cyclic cohomology, where the twisting comes from the generator of the modular group of the Haar state. In contrast to the Cuntz algebras studied in [A.L. Carey, J. Phillips, A. Rennie, Twisted cyclic theory and an index theory for the gauge invariant KMS state on Cuntz algebras. arXiv:0801.4605], the computations are considerably more complex and interesting, because there are non-trivial ‘eta’ contributions to this index.     

Special issue on Econophysics

The area of research described as 'econophysics" is renewing a kinship between physicists and economists and financial practitioners, that has been lost since the 19th century when scientists such as Pascal and Halley made groundbreaking advances in the area. Now, new meetings are revealing new research opportunities outside the established pathways traditionally explored within economics and finance. In December 2001, around 100 researchers from across the world attended the EPS meeting 'Applications of Physics to Financial Analysis' (APFA3). This was held in the Museum of London Conference Centre which was chosen for its proximity to the City of London and its trading centres. The meeting was especially useful in bringing together roughly equal numbers of physicists, mathematicians and financial practitioners. Taking part in the conference we had the impression that, whilst the relation between physics and applied finance may still be at an early stage, it is evolving very quickly. As in nature, a sign of evolution is the emergence of different and specialised branches, each with their own specific character. Papers covered a range of topics, including: market modelling, risk management, agent-based modelling, hedging in incomplete markets, benchmarking, performance measurement, foreign exchange markets, time series analysis and prediction, efficient market hypothesis, equilibrium and non-equilibrium markets, economic and financial networks, the valuation of derivatives, growth and bankruptcy. The meeting was sponsored by the European Physical Society and the UK Institute of Physics. The invited speakers were J.Ph. Bouchaud, J.F. Muzy, K. Sneppen, G. Iori and S. Solomon. Articles outlining some of the more interesting advances in this field have been selected by the Guest Editors, from amongst the submitted articles, and after having been refereed, they are presented here in this edition of EPJ B. APFA3 closed on a positive note. There was a feeling that links between academia and industry are healthy and that these new interactions between Physics and Finance are producing valuable scientific and economic results.     

Unconditional security of practical quantum key distribution

We present a complete protocol for BB84 quantum key distribution for a realistic setting (noise, loss, multi-photon signals of the source) that covers many of todays experimental implementations. The security of this protocol is shown against an eavesdropper having unrestricted power to manipulate the signals coherently on their path from sender to receiver. The protocol and the security proof take into account the effects concerning the finite size of the generated key. This paper is identical to the preprint arXiv:quant-ph/0107017, which was finalized in 2001. Therefore, some of the more recent developments, including the question of composability, are not addressed.     

The individual success of musicians, like that of physicists, follows a stretched exponential distribution

Over the last five years or so, a number of studies have focussed on the distribution of `success' in physics and other sciences; in these studies, `success' is measured by the number of times a paper, or an author, is cited. The distribution of citations of individual papers approximates to a power-law [S. Redner, Eur. Phys. J. B 4, 131 (1998)], while lifetime total citations of the 1120 most-cited physicists follows a stretched exponential [J. Laherrère, D. Sornette, Eur. Phys. J. B 2, 525 (1998)]. Here, I examine the distribution of success in popular music, a field of creativity that has social structures very different from those of physics, and which is generally held to be controlled primarily by fashion. For this study, the lifetime total success of bands was measured by the total number of weeks they were in the weekly `top 75' list of best-selling recordings. Like the lifetime success of physicists reported by Laherrere and Sornette, the success of the 6107 bands that appeared in the UK `top 75' from 1950 until 2000 follows a stretched exponential of the form P(x)dx = c(x ^{c - 1}/x ₀ ^c)exp[- (x/x ₀)^c]dx; for the music data, c = 0.5 and x ₀ = 9.37. Received 23 October 2001 Published online 25 June 2002     

Valuation and dynamic replication of contingent claims in the framework of the beliefs-preferences gauge symmetry

Although symmetries play a major role in physics, their use in finance is relatively new and, to the best of our knowledge, can be traced to 1995 when Kholodnyi introduced the beliefs-preferences gauge symmetry. One of the main outcomes of the beliefs-preferences gauge symmetry is that it allows for the valuation and dynamic replication of contingent claims in a general market environment, that is, in the case of a general, not necessarily diffusion Markov process for the prices of underlying securities. This valuation and dynamic replication is based on the novel ideas of symmetry in contrast to the standard approach which uses stochastic analysis. The practical applications of the beliefs-preferences gauge symmetry range from the detection of a new type of true arbitrage to the beliefs-preferences-independent valuation and dynamic replication of contingent claims in a general market environment. Received 31 December 2001     

Quantum-Like Tunnelling and Levels of Arbitrage

We apply methods of wave mechanics to financial modelling. We proceed by assigning a financial interpretation to wave numbers. This paper makes a plea for the use of the concept of ‘tunnelling’ (in the mathematical formalism of quantum mechanics) in the modelling of financial arbitrage. Financial arbitrage is a delicate concept to model in social science (i.e. in this case economics and finance) as its presence affects the precision of benchmark financial asset prices. In this paper, we attempt to show how ‘tunnelling’ can be used to positive effect in the modelling of arbitrage in a financial asset pricing context.     

Note on quantum groups and integrable systems

The free-field formalism for quantum groups [preprint ITEP-M3/94, CRM-2202 hep-th/9409093] provides a special choice of coordinates on a quantum group. In these coordinates the construction of associated integrable system [arXiv:1207.1869] is especially simple. This choice also fits into general framework of cluster varieties [math.AG/0311245]—natural changes in coordinates are cluster mutations.     

Renormalization group analysis of the 2000–2002 anti-bubble in the US S&P500 index: explanation of the hierarchy of five crashes and prediction

We propose a straightforward extension of our previously proposed log-periodic power-law model of the “anti-bubble” regime of the USA stock market since the summer of 2000, in terms of the renormalization group framework to model critical points. Using a previous work by Gluzman and Sornette (Phys. Rev. E 65 (2003) 036142) on the classification of the class of Weierstrass-like functions, we show that the five crashes that occurred since August 2000 can be accurately modeled by this approach, in a fully consistent way with no additional parameters. Our theory suggests an overall consistent organization of the investors forming a collective network which interact to form the pessimistic bearish “anti-bubble” regime with intermittent acceleration of the positive feedbacks of pessimistic sentiment leading to these crashes. We develop retrospective predictions, that confirm the existence of significant arbitrage opportunities for a trader using our model. Finally, we offer a prediction for the unknown future of the US S&P500 index extending over 2003 and 2004, that refines the previous prediction of Sornette and Zhou (Quant. Finance 2 (2002) 468).     

Differential forms and the Wodzicki residue for manifolds with boundary

In [A. Connes, Quantized calculus and applications, XIth International Congress of Mathematical Physics (Paris,1994), 15–36, Internat Press, Cambridge, MA, 1995], Connes found a conformal invariant using Wodzicki’s 1-density and computed it in the case of 4-dimensional manifold without boundary. In [W. J. Ugalde, Differential forms and the Wodzicki residue, arXiv: Math, DG/0211361], Ugalde generalized the Connes’ result to n-dimensional manifold without boundary. In this paper, we generalize the results of [A. Connes, Quantized calculus and applications, XIth International Congress of Mathematical Physics (Paris,1994), 15–36, Internat Press, Cambridge, MA, 1995] and [W. J. Ugalde, Differential forms and the Wodzicki residue, arXiv: Math, DG/0211361] to the case of manifolds with boundary.     

New localized Superluminal solutions to the wave equations with finite total energies and arbitrary frequencies

By a generalized bidirectional decomposition method, we obtain new Superluminal localized solutions to the wave equation (for the electromagnetic case, in particular) which are suitable for arbitrary frequency bands; several of them being endowed with finite total energy. We construct, among the others, an infinite family of generalizations of the so-called “X-shaped" waves. Results of this kind may find application in the other fields in which an essential role is played by a wave-equation (like acoustics, seismology, geophysics, gravitation, elementary particle physics, etc.). Received 23 June 2002 Published online 24 September 2002 RID="a" ID="a"Work partially supported by MIUR and INFN (Italy), and by FAPESP (Brazil). This paper did first appear as e-print physics/0109062 [and as preprint INFN/FM-01/02 (I.N.F.N.; Frascati, 2001)]. RID="b" ID="b"e-mail: recami@mi.infn.it     

A finite quantum oscillator model related to special sets of Racah polynomials

Physics of Atomic Nuclei - In [R. Oste and J. Van der Jeugt, arXiv: 1507.01821 [math-ph]] we classified all pairs of recurrence relations in which two (dual) Hahn polynomials with different...     

The unrolled quantum group inside Lusztig’s quantum group of divided powers

In this letter we prove that the unrolled small quantum group, appearing in quantum topology, is a Hopf subalgebra of Lusztig’s quantum group of divided powers. We do so by writing down non-obvious primitive elements with the correct adjoint action. As application, we explain how this gives a realization of the unrolled quantum group as operators on a conformal field theory and match some calculations on this side. In particular, our results explain a prominent weight shift that appears in Feigin and Tipunin (Logarithmic CFTs connected with simple Lie algebras, preprint, 2010. arXiv:1002.5047). Our result extends to other Nichols algebras of diagonal type, including super-Lie algebras.

     

Quantum key distribution protocol using dense coding of three-qubit W state

The three-qubit W state, with an important feature that each pair of it’s qubits has the same and maximum amount of bipartite entanglement, can be reduced to an entangled 2-qubit system if one of its qubits is lost. Recently, Xue et al. proposed a three-party quantum secret sharing (QSS) protocol based on the three-qubit W state [Chinese Phys. 15, 7 (2006)]. Also, Joo et al. proposed a pair-wise quantum key distribution protocol among three users based on a special measurement on the three-qubit W state [eprint arXiv:quant-ph/0204003v2 (2002)]. This study aims to propose a novel quantum key distribution protocol (QKDP) for arbitrary two communications based on the dense coding and the special measurement of three-qubit W state with the X basis and the Z basis.     

Quiver elliptic W-algebras

We define elliptic generalization of W-algebras associated with arbitrary quiver using our construction (Kimura and Pestun in Quiver W-algebras, 2015. arXiv:1512.08533 [hep-th]) with six-dimensional gauge theory.     

Translational invariance of the Einstein–Cartan action in any dimension

We demonstrate that from the first order formulation of the Einstein– Cartan action it is possible to derive the basic differential identity that leads to translational invariance of the action in the tangent space. The transformations of fields is written explicitly for both the first and second order formulations and the group properties of transformations are studied. This, combined with the preliminary results from the Hamiltonian formulation (Kiriushcheva and Kuzmin in arXiv:0907.1553 [gr-qc]), allows us to conclude that without any modification, the Einstein–Cartan action in any dimension higher than two possesses not only rotational invariance but also a form of translational invariance in the tangent space. We argue that not only a complete Hamiltonian analysis can unambiguously give an answer to the question of what a gauge symmetry is, but also the pure Lagrangian methods allow us to find the same gauge symmetry from the basic differential identities.     

Simple and efficient relaxation methods for interfaces separating compressible fluids,cavitating flows and shocks in multiphase mixtures

Numerical approximation of the five-equation two-phase flow of Kapila et al. [A.K. Kapila, R. Menikoff, J.B. Bdzil, S.F. Son, D.S. Stewart, Two-phase modeling of deflagration-to-detonation transition in granular materials: reduced equations, Physics of Fluids 13(10) (2001) 3002–3024] is examined. This model has shown excellent capabilities for the numerical resolution of interfaces separating compressible fluids as well as wave propagation in compressible mixtures [A. Murrone, H. Guillard, A five equation reduced model for compressible two phase flow problems, Journal of Computational Physics 202(2) (2005) 664–698; R. Abgrall, V. Perrier, Asymptotic expansion of a multiscale numerical scheme for compressible multiphase flows, SIAM Journal of Multiscale and Modeling and Simulation (5) (2006) 84–115; F. Petitpas, E. Franquet, R. Saurel, O. Le Metayer, A relaxation-projection method for compressible flows. Part II. The artificial heat exchange for multiphase shocks, Journal of Computational Physics 225(2) (2007) 2214–2248]. However, its numerical approximation poses some serious difficulties. Among them, the non-monotonic behavior of the sound speed causes inaccuracies in wave’s transmission across interfaces. Moreover, volume fraction variation across acoustic waves results in difficulties for the Riemann problem resolution, and in particular for the derivation of approximate solvers. Volume fraction positivity in the presence of shocks or strong expansion waves is another issue resulting in lack of robustness. To circumvent these difficulties, the pressure equilibrium assumption is relaxed and a pressure non-equilibrium model is developed. It results in a single velocity, non-conservative hyperbolic model with two energy equations involving relaxation terms. It fulfills the equation of state and energy conservation on both sides of interfaces and guarantees correct transmission of shocks across them. This formulation considerably simplifies numerical resolution. Following a strategy developed previously for another flow model [R. Saurel, R. Abgrall, A multiphase Godunov method for multifluid and multiphase flows, Journal of Computational Physics 150 (1999) 425–467], the hyperbolic part is first solved without relaxation terms with a simple, fast and robust algorithm, valid for unstructured meshes. Second, stiff relaxation terms are solved with a Newton method that also guarantees positivity and robustness. The algorithm and model are compared to exact solutions of the Euler equations as well as solutions of the five-equation model under extreme flow conditions, for interface computation and cavitating flows involving dynamics appearance of interfaces. In order to deal with correct dynamic of shock waves propagating through multiphase mixtures, the artificial heat exchange method of Petitpas et al. [F. Petitpas, E. Franquet, R. Saurel, O. Le Metayer, A relaxation-projection method for compressible flows. Part II. The artificial heat exchange for multiphase shocks, Journal of Computational Physics 225(2) (2007) 2214–2248] is adapted to the present formulation.     

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.