The Condition of the Conditionality

The interdependence of options is common among compound options. Moreover, this interconnectedness is synonymous with probability theory-how a set of axioms are treated. The conditionality, where one option value is dependent on another option, has spilled over to option pricing, especially exchange options. However, it seems that no study has explored whether that simultaneous occurrence of two options is conditional or not. This study uses conditional approaches (Radon–Nikodým derivative and probability theory) to illustrate conditionality in an exchange option. Furthermore, hedging strategy is derived based on straddles. The results show that due to conditionality another exotic option, tri-conditional option (also known as triple option) is derived. The hedging of a triple option encompasses both dynamic and static techniques.

A PATCHWORK QUILT SEWN FROM BROWNIAN FABRIC: REGULARITY OF POLYMER WEIGHT PROFILES IN BROWNIAN LAST PASSAGE PERCOLATION

In last passage percolation models lying in the Kardar–Parisi–Zhang (KPZ) universality class, the energy of long energy-maximizing paths may be studied as a function of the paths’ pair of endpoint locations. Scaled coordinates may be introduced, so that these maximizing paths, or polymers, now cross unit distances with unit-order fluctuations, and have scaled energy, or weight, of unit order. In this article, we consider Brownian last passage percolation in these scaled coordinates. In the narrow wedge case, when one endpoint of such polymers is fixed, say at $(0,0)\in \mathbb{R}^{2}$ , and the other is varied horizontally, over $(z,1)$ , $z\in \mathbb{R}$ , the polymer weight profile as a function of $z\in \mathbb{R}$ is locally Brownian; indeed, by Hammond [‘Brownian regularity for the Airy line ensemble, and multi-polymer watermelons in Brownian last passage percolation’, Preprint (2016), arXiv:1609.02971, Theorem 2.11 and Proposition 2.5], the law of the profile is known to enjoy a very strong comparison to Brownian bridge on a given compact interval, with a Radon–Nikodym derivative in every $L^{p}$ space for $p\in (1,\infty )$ , uniformly in the scaling parameter, provided that an affine adjustment is made to the weight profile before the comparison is made. In this article, we generalize this narrow wedge case and study polymer weight profiles begun from a very general initial condition. We prove that the profiles on a compact interval resemble Brownian bridge in a uniform sense: splitting the compact interval into a random but controlled number of patches, the profile in each patch after affine adjustment has a Radon–Nikodym derivative that lies in every $L^{p}$ space for $p\in (1,3)$ . This result is proved by harnessing an understanding of the uniform coalescence structure in the field of polymers developed in Hammond [‘Exponents governing the rarity of disjoint polymers in Brownian last passage percolation’, Preprint (2017a), arXiv:1709.04110] using techniques from Hammond (2016) and [‘Modulus of continuity of polymer weight profiles in Brownian last passage percolation’, Preprint (2017b), arXiv:1709.04115].

Family of measures on a space of curves that are quasi-invariant with respect to some action of diffeomorphisms group

A family of quasi-invariant measures on the special functional space of curves in a finite-dimensional Euclidean space with respect to the action of diffeomorphisms is constructed. The main result is an explicit expression for the Radon–Nikodym derivative of the transformed measure relative to the original one. The stochastic Ito integral allows to express the result in an invariant form for a wider class of diffeomorphisms. These measures can be used to obtain irreducible unitary representations of the diffeomorphisms group which will be studied in future research. A geometric interpretation of the action considered together with a generalization to the multidimensional case makes such representations applicable to problems of quantum mechanics.

Almost everywhere convergence of ergodic series

We consider ergodic series of the form $\sum _{n=0}^{\infty }a_{n}f(T^{n}x)$, where $f$ is an integrable function with zero mean value with respect to a $T$-invariant measure $\unicode[STIX]{x1D707}$. Under certain conditions on the dynamical system $T$, the invariant measure $\unicode[STIX]{x1D707}$ and the function $f$, we prove that the series converges $\unicode[STIX]{x1D707}$-almost everywhere if and only if $\sum _{n=0}^{\infty }|a_{n}|^{2}<\infty$, and that in this case the sum of the convergent series is exponentially integrable and satisfies a Khintchine-type inequality. We also prove that the system $\{f\circ T^{n}\}$ is a Riesz system if and only if the spectral measure of $f$ is absolutely continuous with respect to the Lebesgue measure and the Radon–Nikodym derivative is bounded from above as well as from below by a constant. We check the conditions for Gibbs measures $\unicode[STIX]{x1D707}$ relative to hyperbolic dynamics $T$ and for Hölder functions $f$. An application is given to the study of differentiability of the Weierstrass-type functions $\sum _{n=0}^{\infty }a_{n}f(3^{n}x)$.

Information Measures

This chapter presents a higher-order-logic formalization of the main concepts of information theory (Cover & Thomas, 1991), such as the Shannon entropy and mutual information, using the formalization of the foundational theories of measure, Lebesgue integration, and probability. The main results of the chapter include the formalizations of the Radon-Nikodym derivative and the Kullback-Leibler (KL) divergence (Coble, 2010). The latter provides a unified framework based on which most of the commonly used measures of information can be defined. The chapter then provides the general definitions that are valid for both discrete and continuous cases and then proves the corresponding reduced expressions where the measures considered are absolutely continuous over finite spaces.

A SUPER RADON-NIKODYM DERIVATIVE FOR ALMOST SUBADDITIVE SET FUNCTIONS

In classical measure theory, the Radon-Nikodym theorem states in a concise condition, namely domination, how a measure can be factorized by another (bounded) measure through a density function. Several approaches have been undertaken to see under which conditions an exact factorization can be obtained with set functions that are not σ-additive (for instance finitely additive set functions or submeasures). We provide a Radon-Nikodym type theorem with respect to a measure for almost subadditive set functions with bounded disjoint variation. The necessary and sufficient condition to guarantee a superior Radon-Nikodym derivative remains the standard domination condition for measures. We show how these set functions admit an equivalent factorization under the standard domination condition for set functions.

A Nearly Exact Reformulation of the Girsanov Linearization for Stochastically Driven Nonlinear Oscillators

The Girsanov linearization method (GLM), proposed earlier in Saha, N., and Roy, D., 2007, “The Girsanov Linearisation Method for Stochastically Driven Nonlinear Oscillators,” J. Appl. Mech.,74, pp. 885–897, is reformulated to arrive at a nearly exact, semianalytical, weak and explicit scheme for nonlinear mechanical oscillators under additive stochastic excitations. At the heart of the reformulated linearization is a temporally localized rejection sampling strategy that, combined with a resampling scheme, enables selecting from and appropriately modifying an ensemble of locally linearized trajectories while weakly applying the Girsanov correction (the Radon–Nikodym derivative) for the linearization errors. The semianalyticity is due to an explicit linearization of the nonlinear drift terms and it plays a crucial role in keeping the Radon–Nikodym derivative “nearly bounded” above by the inverse of the linearization time step (which means that only a subset of linearized trajectories with low, yet finite, probability exceeds this bound). Drift linearization is conveniently accomplished via the first few (lower order) terms in the associated stochastic (Ito) Taylor expansion to exclude (multiple) stochastic integrals from the numerical treatment. Similarly, the Radon–Nikodym derivative, which is a strictly positive, exponential (super-) martingale, is converted to a canonical form and evaluated over each time step without directly computing the stochastic integrals appearing in its argument. Through their numeric implementations for a few low-dimensional nonlinear oscillators, the proposed variants of the scheme, presently referred to as the Girsanov corrected linearization method (GCLM), are shown to exhibit remarkably higher numerical accuracy over a much larger range of the time step size than is possible with the local drift-linearization schemes on their own.

Option Pricing under Risk-Minimization Criterion in an Incomplete Market with the Finite Difference Method

We study option pricing with risk-minimization criterion in an incomplete market where the dynamics of the risky underlying asset is governed by a jump diffusion equation with stochastic volatility. We obtain the Radon-Nikodym derivative for the minimal martingale measure and a partial integro-differential equation (PIDE) of European option. The finite difference method is employed to compute the European option valuation of PIDE.