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.

The Hurst exponent as an indicator of the behaviour of a model monopile in an ocean wave testing basin

With the importance of renewable energy well-established worldwide, and targets of such energy quantified in many cases, there exists a considerable interest in the assessment of wind and wave devices. While the individual components of these devices are often relatively well understood and the aspects of energy generation well researched, there seems to be a gap in the understanding of these devices as a whole and especially in the field of their dynamic responses under operational conditions. The mathematical modelling and estimation of their dynamic responses are more evolved but research directed towards testing of these devices still requires significant attention. Model-free indicators of the dynamic responses of these devices are important since it reflects the as-deployed behaviour of the devices when the exposure conditions are scaled reasonably correctly, along with the structural dimensions. This paper demonstrates how the Hurst exponent of the dynamic responses of a monopile exposed to different exposure conditions in an ocean wave basin can be used as a model-free indicator of various responses. The scaled model is exposed to Froude scaled waves and tested under different exposure conditions. The analysis and interpretation is carried out in a model-free and output-only environment, with only some preliminary ideas regarding the input of the system. The analysis indicates how the Hurst exponent can be an interesting descriptor to compare and contrast various scenarios of dynamic response conditions.