Financial modelling with 2-EPT probability density functions

The class of all Exponential-Polynomial-Trigonometric (EPT) functions is classical and equal to the Euler-d’Alembert class of solutions of linear differential equations with constant coefficients. The class of non-negative EPT functions defined on [0;1) was discussed in Hanzon and Holland (2010) of which EPT probability density functions are an important subclass. EPT functions can be represented as ceAxb, where A is a square matrix, b a column vector and c a row vector where the triple (A; b; c) is the minimal realization of the EPT function. The minimal triple is only unique up to a basis transformation. Here the class of 2-EPT probability density functions on R is defined and shown to be closed under a variety of operations. The class is also generalised to include mixtures with the pointmass at zero. This class coincides with the class of probability density functions with rational characteristic functions. It is illustrated that the Variance Gamma density is a 2-EPT density under a parameter restriction. A discrete 2-EPT process is a process which has stochastically independent 2-EPT random variables as increments. It is shown that the distribution of the minimum and maximum of such a process is an EPT density mixed with a pointmass at zero. The Laplace Transform of these distributions correspond to the discrete time Wiener-Hopf factors of the discrete time 2-EPT process. A distribution of daily log-returns, observed over the period 1931-2011 from a prominent US index, is approximated with a 2-EPT density function. Without the non-negativity condition, it is illustrated how this problem is transformed into a discrete time rational approximation problem. The rational approximation software RARL2 is used to carry out this approximation. The non-negativity constraint is then imposed via a convex optimisation procedure after the unconstrained approximation. Sufficient and necessary conditions are derived to characterise infinitely divisible EPT and 2-EPT functions. Infinitely divisible 2-EPT density functions generate 2-EPT Lévy processes. An assets log returns can be modelled as a 2-EPT Lévy process. Closed form pricing formulae are then derived for European Options with specific times to maturity. Formulae for discretely monitored Lookback Options and 2-Period Bermudan Options are also provided. Certain Greeks, including Delta and Gamma, of these options are also computed analytically. MATLAB scripts are provided for calculations involving 2-EPT functions. Numerical option pricing examples illustrate the effectiveness of the 2-EPT approach to financial modelling.

Effects of gestational and postnatal exposure to chronic intermittent hypoxia on diaphragm muscle contractile function in the rat

Alterations to the supply of oxygen during early life presents a profound stressor to physiological systems with aberrant remodeling that is often long-lasting. Chronic intermittent hypoxia (CIH) is a feature of apnea of prematurity, chronic lung disease, and sleep apnea. CIH affects respiratory control but there is a dearth of information concerning the effects of CIH on respiratory muscles, including the diaphragm—the major pump muscle of breathing. We investigated the effects of exposure to gestational CIH (gCIH) and postnatal CIH (pCIH) on diaphragm muscle function in male and female rats. CIH consisted of exposure in environmental chambers to 90 s of hypoxia reaching 5% O2 at nadir, once every 5 min, 8 h a day. Exposure to gCIH started within 24 h of identification of a copulation plug and continued until day 20 of gestation; animals were studied on postnatal day 22 or 42. For pCIH, pups were born in normoxia and within 24 h of delivery were exposed with dams to CIH for 3 weeks; animals were studied on postnatal day 22 or 42. Sham groups were exposed to normoxia in parallel. Following gas exposures, diaphragm muscle contractile, and endurance properties were examined ex vivo. Neither gCIH nor pCIH exposure had effects on diaphragm muscle force-generating capacity or endurance in either sex. Similarly, early life exposure to CIH did not affect muscle tolerance of severe hypoxic stress determined ex vivo. The findings contrast with our recent observation of upper airway dilator muscle weakness following exposure to pCIH. Thus, the present study suggests a relative resilience to hypoxic stress in diaphragm muscle. Co-ordinated activity of thoracic pump and upper airway dilator muscles is required for optimal control of upper airway caliber. A mismatch in the force-generating capacity of the complementary muscle groups could have adverse consequences for the control of airway patency and respiratory homeostasis.