Mathematical Aspects of Financial Markets with Frictions

Frictions are factors that hinder trading of securities in financial markets. Typical frictions include limited market depth, transaction costs, lack of infinite divisibility of securities, and taxes. Conventional models used in mathematical finance often gloss over these issues, which affect almost all financial markets, by arguing that the impact of frictions is negligible and, consequently, the frictionless models are valid approximations. This dissertation consists of three research papers, which are related to the study of the validity of such approximations in two distinct modeling problems. Models of price dynamics that are based on diffusion processes, i.e., continuous strong Markov processes, are widely used in the frictionless scenario. The first paper establishes that diffusion models can indeed be understood as approximations of price dynamics in markets with frictions. This is achieved by introducing an agent-based model of a financial market where finitely many agents trade a financial security, the price of which evolves according to price impacts generated by trades. It is shown that, if the number of agents is large, then under certain assumptions the price process of security, which is a pure-jump process, can be approximated by a one-dimensional diffusion process. In a slightly extended model, in which agents may exhibit herd behavior, the approximating diffusion model turns out to be a stochastic volatility model. Finally, it is shown that when agents' tendency to herd is strong, logarithmic returns in the approximating stochastic volatility model are heavy-tailed. The remaining papers are related to no-arbitrage criteria and superhedging in continuous-time option pricing models under small-transaction-cost asymptotics. Guasoni, Rásonyi, and Schachermayer have recently shown that, in such a setting, any financial security admits no arbitrage opportunities and there exist no feasible superhedging strategies for European call and put options written on it, as long as its price process is continuous and has the so-called conditional full support (CFS) property. Motivated by this result, CFS is established for certain stochastic integrals and a subclass of Brownian semistationary processes in the two papers. As a consequence, a wide range of possibly non-Markovian local and stochastic volatility models have the CFS property.

Observation of a power-law memory kernel for fluctuations within a single protein molecule

The fluctuation of the distance between a fluorescein-tyrosine pair within a single protein complex was directly monitored in real time by photoinduced electron transfer and found to be a stationary, time-reversible, and non-Markovian Gaussian process. Within the generalized Langevin equation formalism, we experimentally determine the memory kernel K(t), which is proportional to the autocorrelation function of the random fluctuating force. K(t) is a power-law decay, t(-0.51 +/- 0.07) in a broad range of time scales (10(-3)-10 s). Such a long-time memory effect could have implications for protein functions.

Brownian motion of spins; generalized spin Langevin equation

We derive the Langevin equations for a spin interacting with a heat bath, starting from a fully dynamical treatment. The obtained equations are non-Markovian with multiplicative fluctuations and concommitant dissipative terms obeying the fluctuation-dissipation theorem. In the Markovian limit our equations reduce to the phenomenological equations proposed by Kubo and Hashitsume. The perturbative treatment on our equations lead to Landau-Lifshitz equations and to other known results in the literature.

Solvation dynamics in a Brownian dipolar lattice. Comparison between computer simulation and various molecular theories of solvation dynamics

Several recent theoretical and computer simulation studies have considered solvation dynamics in a Brownian dipolar lattice which provides a simple model solvent for which detailed calculations can be carried out. In this article a fully microscopic calculation of the solvation dynamics of an ion in a Brownian dipolar lattice is presented. The calculation is based on the non‐Markovian molecular hydrodynamic theory developed recently. The main assumption of the present calculation is that the two‐particle orientational correlation functions of the solid can be replaced by those of the liquid state. It is shown that such a calculation provides an excellent agreement with the computer simulation results. More importantly, the present calculations clearly demonstrate that the frequency‐dependent dielectric friction plays an important role in the long time decay of the solvation time correlation function. We also find that the present calculation provides somewhat better agreement than either the dynamic mean spherical approximation (DMSA) or the Fried–Mukamel theory which use the simulated frequency‐dependent dielectric function. It is found that the dissipative kernels used in the molecular hydrodynamic approach and in the Fried–Mukamel theory are vastly different, especially at short times. However, in spite of this disagreement, the two theories still lead to comparable results in good agreement with computer simulation, which suggests that even a semiquantitatively accurate dissipative kernel may be sufficient to obtain a reliable solvation time correlation function. A new wave vector and frequency‐dependent dissipative kernel (or memory function) is proposed which correctly goes over to the appropriate expressions in both the single particle and the collective limits. This form is expected to lead to better results than all the existing descriptions.

Diffusing-wave spectroscopy in an inhomogeneous object: Local viscoelastic spectra from ultrasound-assisted measurement of correlation decay arising from the ultrasound focal volume

We demonstrate diffusing-wave spectroscopy (DWS) in a localized region of a viscoelastically inhomogeneous object by measurement of the intensity autocorrelation g(2)(tau)] that captures only the decay introduced by the temperature-induced Brownian motion in the region. The region is roughly specified by the focal volume of an ultrasound transducer which introduces region specific mechanical vibration owing to insonification. Essential characteristics of the localized non-Markovian dynamics are contained in the decay of the modulation depth M(tau)], introduced by the ultrasound forcing in the focal volume selected, on g(2)(tau). The modulation depth M(tau(i)) at any delay time tau(i) can be measured by short-time Fourier transform of g(2)(tau) and measurement of the magnitude of the spectrum at the ultrasound drive frequency. By following the established theoretical framework of DWS, we are able to connect the decay in M(tau) to the mean-squared displacement (MSD) of scattering centers and the MSD to G*(omega), the complex viscoelastic spectrum. A two-region composite polyvinyl alcohol phantom with different viscoelastic properties is selected for demonstrating local DWS-based recovery of G*(omega) corresponding to these regions from the measured region specific M(tau(i))vs tau(i). The ultrasound-assisted measurement of MSD is verified by simulating, using a generalized Langevin equation (GLE), the dynamics of the particles in the region selected as well as by the usual DWS experiment without the ultrasound. It is shown that whereas the MSD obtained by solving the GLE without the ultrasound forcing agreed with its experimental counterpart covering small and large values of tau, the match was good only in the initial transients in regard to experimental measurements with ultrasound.

Memory-induced anomalous dynamics in a minimal random walk model

A discrete-time dynamics of a non-Markovian random walker is analyzed using a minimal model where memory of the past drives the present dynamics. In recent work N. Kumar et al., Phys. Rev. E 82, 021101 (2010)] we proposed a model that exhibits asymptotic superdiffusion, normal diffusion, and subdiffusion with the sweep of a single parameter. Here we propose an even simpler model, with minimal options for the walker: either move forward or stay at rest. We show that this model can also give rise to diffusive, subdiffusive, and superdiffusive dynamics at long times as a single parameter is varied. We show that in order to have subdiffusive dynamics, the memory of the rest states must be perfectly correlated with the present dynamics. We show explicitly that if this condition is not satisfied in a unidirectional walk, the dynamics is only either diffusive or superdiffusive (but not subdiffusive) at long times.

Dynamics of history-dependent epidemics in temporal networks

The structural properties of temporal networks often influence the dynamical processes that occur on these networks, e.g., bursty interaction patterns have been shown to slow down epidemics. In this paper, we investigate the effect of link lifetimes on the spread of history-dependent epidemics. We formulate an analytically tractable activity-driven temporal network model that explicitly incorporates link lifetimes. For Markovian link lifetimes, we use mean-field analysis for computing the epidemic threshold, while the effect of non-Markovian link lifetimes is studied using simulations. Furthermore, we also study the effect of negative correlation between the number of links spawned by an individual and the lifetimes of those links. Such negative correlations may arise due to the finite cognitive capacity of the individuals. Our investigations reveal that heavy-tailed link lifetimes slow down the epidemic, while negative correlations can reduce epidemic prevalence. We believe that our results help shed light on the role of link lifetimes in modulating diffusion processes on temporal networks.

Topics in gravitational-wave science : macroscopic quantum mechanics and black hole physics

The theories of relativity and quantum mechanics, the two most important physics discoveries of the 20th century, not only revolutionized our understanding of the nature of space-time and the way matter exists and interacts, but also became the building blocks of what we currently know as modern physics. My thesis studies both subjects in great depths --- this intersection takes place in gravitational-wave physics.

Gravitational waves are "ripples of space-time", long predicted by general relativity. Although indirect evidence of gravitational waves has been discovered from observations of binary pulsars, direct detection of these waves is still actively being pursued. An international array of laser interferometer gravitational-wave detectors has been constructed in the past decade, and a first generation of these detectors has taken several years of data without a discovery. At this moment, these detectors are being upgraded into second-generation configurations, which will have ten times better sensitivity. Kilogram-scale test masses of these detectors, highly isolated from the environment, are probed continuously by photons. The sensitivity of such a quantum measurement can often be limited by the Heisenberg Uncertainty Principle, and during such a measurement, the test masses can be viewed as evolving through a sequence of nearly pure quantum states.

The first part of this thesis (Chapter 2) concerns how to minimize the adverse effect of thermal fluctuations on the sensitivity of advanced gravitational detectors, thereby making them closer to being quantum-limited. My colleagues and I present a detailed analysis of coating thermal noise in advanced gravitational-wave detectors, which is the dominant noise source of Advanced LIGO in the middle of the detection frequency band. We identified the two elastic loss angles, clarified the different components of the coating Brownian noise, and obtained their cross spectral densities.

The second part of this thesis (Chapters 3-7) concerns formulating experimental concepts and analyzing experimental results that demonstrate the quantum mechanical behavior of macroscopic objects - as well as developing theoretical tools for analyzing quantum measurement processes. In Chapter 3, we study the open quantum dynamics of optomechanical experiments in which a single photon strongly influences the quantum state of a mechanical object. We also explain how to engineer the mechanical oscillator's quantum state by modifying the single photon's wave function.

In Chapters 4-5, we build theoretical tools for analyzing the so-called "non-Markovian" quantum measurement processes. Chapter 4 establishes a mathematical formalism that describes the evolution of a quantum system (the plant), which is coupled to a non-Markovian bath (i.e., one with a memory) while at the same time being under continuous quantum measurement (by the probe field). This aims at providing a general framework for analyzing a large class of non-Markovian measurement processes. Chapter 5 develops a way of characterizing the non-Markovianity of a bath (i.e.,whether and to what extent the bath remembers information about the plant) by perturbing the plant and watching for changes in the its subsequent evolution. Chapter 6 re-analyzes a recent measurement of a mechanical oscillator's zero-point fluctuations, revealing nontrivial correlation between the measurement device's sensing noise and the quantum rack-action noise.

Chapter 7 describes a model in which gravity is classical and matter motions are quantized, elaborating how the quantum motions of matter are affected by the fact that gravity is classical. It offers an experimentally plausible way to test this model (hence the nature of gravity) by measuring the center-of-mass motion of a macroscopic object.

The most promising gravitational waves for direct detection are those emitted from highly energetic astrophysical processes, sometimes involving black holes - a type of object predicted by general relativity whose properties depend highly on the strong-field regime of the theory. Although black holes have been inferred to exist at centers of galaxies and in certain so-called X-ray binary objects, detecting gravitational waves emitted by systems containing black holes will offer a much more direct way of observing black holes, providing unprecedented details of space-time geometry in the black-holes' strong-field region.

The third part of this thesis (Chapters 8-11) studies black-hole physics in connection with gravitational-wave detection.

Chapter 8 applies black hole perturbation theory to model the dynamics of a light compact object orbiting around a massive central Schwarzschild black hole. In this chapter, we present a Hamiltonian formalism in which the low-mass object and the metric perturbations of the background spacetime are jointly evolved. Chapter 9 uses WKB techniques to analyze oscillation modes (quasi-normal modes or QNMs) of spinning black holes. We obtain analytical approximations to the spectrum of the weakly-damped QNMs, with relative error O(1/L^2), and connect these frequencies to geometrical features of spherical photon orbits in Kerr spacetime. Chapter 11 focuses mainly on near-extremal Kerr black holes, we discuss a bifurcation in their QNM spectra for certain ranges of (l,m) (the angular quantum numbers) as a/M → 1. With tools prepared in Chapter 9 and 10, in Chapter 11 we obtain an analytical approximate for the scalar Green function in Kerr spacetime.

Embedding quantum simulators

79 p.

Quantum Simulation of Dissipative Processes without Reservoir Engineering

We present a quantum algorithm to simulate general finite dimensional Lindblad master equations without the requirement of engineering the system-environment interactions. The proposed method is able to simulate both Markovian and non-Markovian quantum dynamics. It consists in the quantum computation of the dissipative corrections to the unitary evolution of the system of interest, via the reconstruction of the response functions associated with the Lindblad operators. Our approach is equally applicable to dynamics generated by effectively non-Hermitian Hamiltonians. We confirm the quality of our method providing specific error bounds that quantify its accuracy.

Processos estocásticos em teoria de campos e aplicação ao universo inflacionário

É conhecido que derivações microscópicas obtidas através de métodos de teoria quântica de campos (TQC) podem conduzir a complicadas equações de movimento (EdM) que possuem um termo dissipativo com memória e um termo de ruído colorido. Um caso particularmente interessante é o modelo que escreve a interação entre um sistema e um banho térmico a temperatura T. Motivado por isso, usamos uma prescrição que nos permite reescrever EdMs não-markovianas semelhantes as obtidas em TQC em termos de um sistema de equações locais, para então confrontarmos a solução desse sistema com a solução aproximada usada correntemente na literatura, a chamada aproximação markoviana. A pergunta chave a qual se pretende responder aqui é: dado um conjunto de parâmetros que descrevem o modelo, a aproximação markoviana é suficientemente boa para descrever a dinâmica do sistema se comparada a dinâmica obtida atravéS da EdM não-markoviana? Além disso, consideramos uma versão linear da ELG de forma que pudéssemos determinar o nível de confiança da nossa metodologia numérica, procedimento este realizado comparando-se a solução analítica com a solução numérica. Como exemplo de aplicação prática do tema discutido aqui, comparamos a evolução não-markoviana do inflaton com a evolução markoviana do mesmo num modelo de universo primordial denominado inflação não-isentrópica (warm inflation).

Exact quantum master equation via the calculus on path integrals

An exact quantum master equation formalism is constructed for the efficient evaluation of quantum non-Markovian dissipation beyond the weak system-bath interaction regime in the presence of time-dependent external field. A novel truncation scheme is further proposed and compared with other approaches to close the resulting hierarchically coupled equations of motion. The interplay between system-bath interaction strength, non-Markovian property, and required level of hierarchy is also demonstrated with the aid of simple spin-boson systems. (C) 2005 American Institute of Physics.

Dynamics of quantum dissipation systems interacting with fermion and boson grand canonical bath ensembles: Hierarchical equations of motion approach

A hierarchical equations of motion formalism for a quantum dissipation system in a grand canonical bath ensemble surrounding is constructed on the basis of the calculus-on-path-integral algorithm, together with the parametrization of arbitrary non-Markovian bath that satisfies fluctuation-dissipation theorem. The influence functionals for both the fermion or boson bath interaction are found to be of the same path integral expression as the canonical bath, assuming they all satisfy the Gaussian statistics. However, the equation of motion formalism is different due to the fluctuation-dissipation theories that are distinct and used explicitly. The implications of the present work to quantum transport through molecular wires and electron transfer in complex molecular systems are discussed. (c) 2007 American Institute of Physics.

Quantum master equation scheme of time-dependent density functional theory to time-dependent transport in nanoelectronic devices

In this work a practical scheme is developed for the first-principles study of time-dependent quantum transport. The basic idea is to combine the transport master equation with the well-known time-dependent density functional theory. The key ingredients of this paper include (i) the partitioning-free initial condition and the consideration of the time-dependent bias voltages which base our treatment on the Runge-Gross existence theorem; (ii) the non-Markovian master equation for the reduced (many-body) central system (i.e., the device); and (iii) the construction of Kohn-Sham master equations for the reduced single-particle density matrix, where a number of auxiliary functions are introduced and their equations of motion (EOMs) are established based on the technique of spectral decomposition. As a result, starting with a well-defined initial state, the time-dependent transport current can be calculated simultaneously along with the propagation of the Kohn-Sham master equation and the EOMs of the auxiliary functions.

Green function for the diffusion limit of one-dimensional continuous time random walks

It is shown how the fractional probability density diffusion equation for the diffusion limit of one-dimensional continuous time random walks may be derived from a generalized Markovian Chapman-Kolmogorov equation. The non-Markovian behaviour is incorporated into the Markovian Chapman-Kolmogorov equation by postulating a Levy like distribution of waiting times as a kernel. The Chapman-Kolmogorov equation so generalised then takes on the form of a convolution integral. The dependence on the initial conditions typical of a non-Markovian process is treated by adding a time dependent term involving the survival probability to the convolution integral. In the diffusion limit these two assumptions about the past history of the process are sufficient to reproduce anomalous diffusion and relaxation behaviour of the Cole-Cole type. The Green function in the diffusion limit is calculated using the fact that the characteristic function is the Mittag-Leffler function. Fourier inversion of the characteristic function yields the Green function in terms of a Wright function. The moments of the distribution function are evaluated from the Mittag-Leffler function using the properties of characteristic functions and a relation between the powers of the second moment and higher order even moments is derived. (C) 2004 Elsevier B.V. All rights reserved.