SearcharxivSearch

arXiv subjects

Hardy Hulley

Publications and source records attributed to Hardy Hulley.

6 recordsLinked to original sources

Arbitrage Problems with Reflected Geometric Brownian Motion

Contrary to the claims made by several authors, a financial market model in which the price of a risky security follows a reflected geometric Brownian motion is not arbitrage-free. In fact, such models violate even the weakest no-arbitrage condition considered in the literature. Consequently, they do not admit numéraire portfolios or equivalent risk-neutral probability measures, which makes them totally unsuitable for contingent claim valuation. Unsurprisingly, the published option pricing formulae for such models violate textbook no-arbitrage bounds.

q-fin.MF

Short Selling with Margin Risk and Recall Risk

Short sales are regarded as negative purchases in textbook asset pricing theory. In reality, however, the symmetry between purchases and short sales is broken by a variety of costs and risks peculiar to the latter. We formulate an optimal stopping model in which the decision to cover a short position is affected by two short sale-specific frictions---margin risk and recall risk. Margin risk refers to the fact that short sales are collateralised transactions, which means that short sellers may be forced to close out their positions involuntarily if they cannot fund margin calls. Recall risk refers to a peculiarity of the stock lending market, which permits lenders to recall borrowed stock at any time, once again triggering involuntary close-outs. We examine the effect of these frictions on the optimal close-out strategy and quantify the loss of value resulting from each. Our results show that realistic short selling constraints have a dramatic impact on the optimal behaviour of a short seller, and are responsible for a substantial loss of value relative to the first-best situation without them. This has implications for many familiar no-arbitrage identities, which are predicated on the assumption of unfettered short selling.

q-fin.MF

A remark on H1 martingales

The space of H1 martingales is interesting because of its duality with the space of BMO martingales. It is straightforward to show that every H1 martingale is a uniformly integrable martingale. However, the converse is not true. That is to say, some uniformly integrable martingales are not H1 martingales. This brief note provides a template for systematically constructing such processes.

math.PR

Weak Tail Conditions for Local Martingales

The following conditions are necessary and sufficient for an arbitrary càdlàg local martingale to be a uniformly integrable martingale: (i) The weak tail of the supremum of its modulus is zero; (ii) its jumps at the first-exit times from compact intervals converge to zero in $L^1$, on the events that those times are finite; and (iii) its almost sure limit is an integrable random variable.

math.PR

Optimal Prediction of the Last-Passage Time of a Transient Diffusion

We identify the integrable stopping time $τ_*$ with minimal $L^1$-distance to the last-passage time $γ_z$ to a given level $z>0$, for an arbitrary non-negative time-homogeneous transient diffusion $X$. We demonstrate that $τ_*$ is in fact the first time that $X$ assumes a value outside a half-open interval $[0,r_*)$. The upper boundary $r_*>z$ of this interval is characterised either as the solution for a one-dimensional optimisation problem, or as part of the solution for a free-boundary problem. A number of concrete examples illustrate the result.

math.PR

Three-dimensional Brownian motion and the golden ratio rule

Let $X=(X_t)_{t\ge0}$ be a transient diffusion process in $(0,\infty)$ with the diffusion coefficient $σ>0$ and the scale function $L$ such that $X_t\rightarrow\infty$ as $t\rightarrow \infty$, let $I_t$ denote its running minimum for $t\ge0$, and let $θ$ denote the time of its ultimate minimum $I_{\infty}$. Setting $c(i,x)=1-2L(x)/L(i)$ we show that the stopping time \[τ_*=\inf\{t\ge0\vert X_t\ge f_*(I_t)\}\] minimizes $\mathsf{E}(\vertθ-τ\vert-θ)$ over all stopping times $τ$ of $X$ (with finite mean) where the optimal boundary $f_*$ can be characterized as the minimal solution to \[f'(i)=-\frac{σ^2(f(i))L'(f(i))}{c(i,f(i))[L(f(i))-L(i)]}\int_i^{f(i)}\frac{c_i'(i,y)[L(y) -L(i)]}{σ^2(y)L'(y)}\,dy\] staying strictly above the curve $h(i)=L^{-1}(L(i)/2)$ for $i>0$. In particular, when $X$ is the radial part of three-dimensional Brownian motion, we find that \[τ_ *=\inf\biggl\{t\ge0\Big\vert\frac{X_t-I_t}{I_t}\geφ\biggr\},\] where $φ=(1+\sqrt{5})/2=1.61\ldots$ is the golden ratio. The derived results are applied to problems of optimal trading in the presence of bubbles where we show that the golden ratio rule offers a rigorous optimality argument for the choice of the well-known golden retracement in technical analysis of asset prices.

math.PR