Arbitrage‐free call option surface construction using regression splines

In this work, we suggest a novel quadratic programming‐based algorithm to generate an arbitrage‐free call option surface. The empirical performance of the proposed method is evaluated using S&P 500 Index call options. Our results indicate that the proposed method provides a more precise fit to observed option prices than other alternative methodologies. Copyright © 2014 John Wiley & Sons, Ltd.     

Stability of a Model of Relativistic Quantum Electrodynamics

The relativistic “no pair” model of quantum electrodynamics uses the Dirac operator, D(A) for the electron dynamics together with the usual self-energy of the quantized ultraviolet cutoff electromagnetic field A– in the Coulomb gauge. There are no positrons because the electron wave functions are constrained to lie in the positive spectral subspace of some Dirac operator, D, but the model is defined for any number, N, of electrons, and hence describes a true many-body system. In addition to the electrons there are a number, K, of fixed nuclei with charges ≤Z. If the fields are not quantized but are classical, it was shown earlier that such a model is always unstable (the ground state energy E=−∞) if one uses the customary D(0) to define the electron space, but is stable (E > − const.(N+K)) if one uses D(A) itself (provided the fine structure constant α and Z are not too large). This result is extended to quantized fields here, and stability is proved for α= 1/137 and Z≤ 42. This formulation of QED is somewhat unusual because it means that the electron Hilbert space is inextricably linked to the photon Fock space. But such a linkage appears to better describe the real world of photons and electrons. Received: 8 September 2001 / Accepted: 18 March 2002     

Segregation in the Falicov--Kimball Model

The Falicov–Kimball model is a simple quantum lattice model that describes light and heavy electrons interacting with an on-site repulsion; alternatively, it is a model of itinerant electrons and fixed nuclei. It can be seen as a simplification of the Hubbard model; by neglecting the kinetic (hopping) energy of the spin up particles, one gets the Falicov–Kimball model. We show that away from half-filling, i.e. if the sum of the densities of both kinds of particles differs from 1, the particles segregate at zero temperature and for large enough repulsion. In the language of the Hubbard model, this means creating two regions with a positive and a negative magnetization. Our key mathematical results are lower and upper bounds for the sum of the lowest eigenvalues of the discrete Laplace operator in an arbitrary domain, with Dirichlet boundary conditions. The lower bound consists of a bulk term, independent of the shape of the domain, and of a term proportional to the boundary. Therefore, one lowers the kinetic energy of the itinerant particles by choosing a domain with a small boundary. For the Falicov- Kimball model, this corresponds to having a single “compact” domain that has no heavy particles. Received: 21 June 2001 / Accepted: 4 January 2002     

Measure change techniques in optimal control

Fully and partially observed stochastic control of systems with nonlinear dynamics and terminal and running costs are considered. Measure changes are introduced which allow both state and observation dynamics to be thought of as linear. In the case when the terms of the cost have a special form the measure change transformation “cancels out” the nonlinearities and changes the original nonlinear problem into a classical LQG one and standard results can be applied. We also consider unnormalized conditional densities of the whole path as state variables and obtain dynamic programming and verification results. R. J. Elliott wishes to acknowledge support of the Natural Sciences and Engineering Research Council of Canada, Grant A7964.     

Characterisation of the photocatalyst Pilkington Activ™: a reference film photocatalyst?

Pilkington Glass Activ™ represents a possible suitable successor to P25 TiO₂, especially as a benchmark photocatalyst film for comparing other photocatalyst or PSH self-cleaning films. Activ™ is a glass product with a clear, colourless, effectively invisible, photocatalytic coating of titania that also exhibits PSH. Although not as active as a film of P25 TiO₂, Activ™ vastly superior mechanical stability, very reproducible activity and widespread commercial availability makes it highly attractive as a reference photocatalytic film. The photocatalytic and photo-induced superhydrophilitic (PSH) properties of Activ™ are studied in some detail and the results reported. Thus, the kinetics of stearic acid destruction (a 10⁴ electron process) are zero order over the stearic acid range 4–129 monolayers and exhibit formal quantum efficiencies (FQE) of 0.7×10⁻⁵ and 10.2×10⁻⁵ molecules per photon when irradiated with light of 365±20 and 254 nm, respectively; the latter appears also to be the quantum yield for Activ™ at 254 nm. The kinetics of stearic acid destruction exhibit Langmuir–Hinshelwood-like saturation type kinetics as a function of oxygen partial pressure, with no destruction occurring in the absence of oxygen and the rate of destruction appearing the same in air and oxygen atmospheres. Further kinetic work revealed a Langmuir adsorption type constant for oxygen of 0.45±0.16 kPa⁻¹ and an activation energy of 19±1 kJ mol⁻¹. A study of the PSH properties of Activ™ reveals a high water contact angle (67°) before ultra-bandgap irradiation reduced to 0° after prolonged irradiation. The kinetics of PSH are similar to those reported by others for sol–gel films using a low level of UV light. The kinetics of contact angle recovery in the dark appear monophasic and different to the biphasic kinetics reported recently by others for sol–gel films [J. Phys. Chem. B 107 (2003) 1028]. Overall, Activ™ appears a very suitable reference material for semiconductor film photocatalysis.     

Robust Dynamics and Control of a Partially Observed Markov Chain

In a seminal paper, Martin Clark (Communications Systems and Random Process Theory, Darlington, 1977, pp. 721–734, 1978) showed how the filtered dynamics giving the optimal estimate of a Markov chain observed in Gaussian noise can be expressed using an ordinary differential equation. These results offer substantial benefits in filtering and in control, often simplifying the analysis and an in some settings providing numerical benefits, see, for example Malcolm et al. (J. Appl. Math. Stoch. Anal., 2007, to appear). Clark’s method uses a gauge transformation and, in effect, solves the Wonham-Zakai equation using variation of constants. In this article, we consider the optimal control of a partially observed Markov chain. This problem is discussed in Elliott et al. (Hidden Markov Models Estimation and Control, Applications of Mathematics Series, vol. 29, 1995). The innovation in our results is that the robust dynamics of Clark are used to compute forward in time dynamics for a simplified adjoint process. A stochastic minimum principle is established.     

Completely Simple Semigroups,Lie Algebras,and the Road Coloring Problem

Consider a semigroup generated by matrices associated with an edge-coloring of a strongly connected, aperiodic digraph. We call the semigroup Lie-solvable if the Lie algebra generated by its elements is solvable. We show that if the semigroup is Lie-solvable then its kernel is a right group. Next, we study the Lie algebra generated by the kernel. Lie algebras generated by two idempotents are analyzed in detail. We find that these have homomorphic images that are generalized quaternion algebras. We show that if the kernel is not a direct product, then the Lie algebra generated by the kernel is not solvable by describing the structure of these algebras. Finally, we discuss an infinite class of examples that are shown to always produce strongly connected aperiodic digraphs having kernels that are not right groups.     

Evaluation of Commodity Trading Advisors using fixed and variable and benchmark models

This paper examines the performance of Commodity Trading Advisors (CTAs) using fixed and variable benchmarking models. In order to avoid the troublesome passive and active commodity and managed futures benchmarks (indices) when examining the performance of CTAs, we innovate by using data envelopment analysis (DEA). Because this alternative class has non-linear returns due to long/short positions, and derivatives (i.e., dynamic trading strategies), DEA can alleviate the problems usually associated with these indices. The effectiveness of using benchmarking models in a DEA setting will provide investors with an alternative technique in assessing the performance and identifying efficient CTAs.     

The existence of smooth densities for the prediction filtering and smoothing problems

The qualitative behavior of buckled states of two different models of elastic beams is studied. It is assumed that random imperfections affect the governing nonlinear equations. It is shown that near the first critical value of the buckling load the stochastic bifurcation is described asymptotically by an algebraic equation whose coeffficients are Gaussian random variables. The corresponding asymptotic expansion for the displacement is to lowest order a Gaussian stochastic process.Work supported by NSF Grant No. DCR81-14726.Work supported by NSF Grant No. DMS87-01895.