arXiv subjects

J. L. McCauley

Publications and source records attributed to J. L. McCauley.

9 recordsLinked to original sources

arXiv2007

Martingale Option Pricing

We show that our generalization of the Black-Scholes partial differential equation (pde) for nontrivial diffusion coefficients is equivalent to a Martingale in the risk neutral discounted stock price. Previously, this was proven for the case of the Gaussian logarithmic returns model by Harrison and Kreps, but we prove it for much a much larger class of returns models where the diffusion coefficient depends on both returns x and time t. That option prices blow up if fat tails in logarithmic returns x are included in the market dynamics is also explained.

physics.soc-ph↗

arXiv2006

Linear vs. Nonlinear Diffusion and Martingale Option Pricing

First, classes of Markov processes that scale exactly with a Hurst exponent H are derived in closed form. A special case of one class is the Tsallis density, advertised elsewhere as nonlinear diffusion or diffusion with nonlinear feedback. But the Tsallis model is only one of a very large class of linear diffusion with a student-t like density. Second, we show by stochastic calculus that our generalization of the Black-Scholes partial differential equation (pde) for variable diffusion coefficients is equivalent to a Martingale in the risk neutral discounted stock price. Previously, this was proven for the restricted case of Gaussian logarithmic returns by Harrison and Kreps, but we prove it here for large classes of empirically useful and theoretically interesting returns models where the diffusion coefficient D(x,t) depends on both logarithmic returns x and time t. Finally, we prove that option prices blow up if fat tails in returns x are included in the market distribution.

physics.soc-ph↗

arXiv2004

A Theory of Fluctuations in Stock Prices

The distribution of price returns for a class of uncorrelated diffusive dynamics is considered. The basic assumptions are (1) that there is a "consensus" value associated with a stock, and (2) that the rate of diffusion depends on the deviation of the stock price from the consensus value. We find an analytical expression for the distribution of returns in terms of the diffusion rate, when the consensus value is assumed to be fixed in time. The analytical solution is shown to match computed histograms in two simple cases. Differences that result when the consensus value is allowed to change with time are presented qualitative explanations.

cond-mat.other↗

arXiv2000

The Galaxy Distribution: Homogeneous, Fractal, or Neither

From the standpoint of theoretical physics we can treat Newtonian cosmology as a problem in nonlinear dynamics. The attempt to average the density, in search of a method of making contact between theory and observation, is replaced by the more systematic idea of coarsegraining. I also explain in this context why two previous attempts at the construction of hierarchical models of the universe are not useful in data analysis. The main ideas behind two older competing data analyses purporting to show evidence from galaxy statistics for either a homogeneous and isotropic universe in one case, and for a mono-fractal universe in the other, are presented and discussed. I also present the method and results of a newer data analysis that shows that visible matter provides no evidence that would allow us to claim that the cosmological principle holds, or that the universe is fractal (or multifractal). In other words, observational data provides us with no evidence that the universe is either homogeneous and isotropic, or monofractal.

astro-ph↗

arXiv2000

The Hentschel-Procaccia Conjecture

Extensive confusion exists and persists in the literature on dynamical systems theory, cosmology, and other fields over spectra of fractal dimensions. Entirely different generating functions have been treated as if they should yield identical spectra, or scaling exponents. An uncritical implicit assumption of universality of scaling exponents is made, even though there is no good theoretical reason to expect scaling exponents to be universal away from criticality. Expectations based on the unphysical and empirically inapplicable zero length scale limit (which would require infinite precision in data analysis) are often taken for granted. A source of confusing together different generating functions can be traced back to the Hentschel-Procaccia conjecture, which I prove to be wrong for the case of data analysis in the only applicable limit, that of finite precision. The two different definitions of 'multifractal' stated by Mandelbrot and by Halsey et are compared and contrasted.

cond-mat.stat-mech↗

arXiv2000

Newtownian Relativity, Gravity, and Cosmology

Well-known to specialists but little-known to the wider audience is that Newtonian gravity can be understood as geodesic motion in space-time, where time is absolute and space is Euclidean. Newtonian cosmology formulated by Heckmann agrees implicitly with Cartan's formulation of Newtonian mechanics as geodesic motion in space-time, but does not unfold the underlying geometric picture. I present the transformation theory of Newtonian mechanics and gravity developed by Cartan and Heckmann, and show via coordinate transformations that Heckmann's Newtonian cosmological model has a center, so that the cosmological principle cannot hold globally. It is possible to confuse the relativity principle with a position of relativism. Mach's principle has much to do with the latter and nothing to do with the former. Both general relativity and nonlinear dynamics inform us that most coordinate systems ae defined locally by differential equations that are globally nonintegrable: global extensions of local coordinates usually do not exist. I explain how defining inertial frames locally by free fall short-circuits Mach's philosophic objectios to Newtonian dynamics.

physics.class-ph↗

arXiv2000

The New Science of Complexity

Deterministic chaos, and even maximum computational complexity, have been discovered within Newtonian dynamics. Economists assume that prices and price changes can also obey abstract mathematical laws of motion. Sociologists and other postmodernists advertise that physics and chemistry have outgrown their former limitations, that chaos and complexity provide new holistic paradigms for science, and that the boundaries between the hard and soft sciences, once impenetrable, have disappeared like the Berlin Wall. Three hundred years after the deaths of Galileo, Descartes, and Kepler, and the birth of Newton, reductionism appears to be on the decline, with holistic approaches to science on the upswing. We therefore examine the evidence that dynamical laws of motion may be discovered from empirical studies of chaotic or complex phenomena, and also review the foundation of reductionism in invariance principle.

physics.class-ph↗

arXiv2000

Nonintegrability, Chaos, and Complexity

Two-dimensional driven dissipative flows are generally integrable via a conservation law that is singular at equilibria. Nonintegrable dynamical systems are confined to n*3 dimensions. Even driven-dissipative deterministic dynamical systems that are critical, chaotic or complex have n-1 local time-independent conservation laws that can be used to simplify the geometric picture of the flow over as many consecutive time intervals as one likes. Those conserevation laws generally have either branch cuts, phase singularities, or both. The consequence of the existence of singular conservation laws for experimental data analysis, and also for the search for scale-invariant critical states via uncontrolled approximations in deterministic dynamical systems, is discussed. Finally, the expectation of ubiquity of scaling laws and universality classes in dynamics is contrasted with the possibility that the most interesting dynamics in nature may be nonscaling, nonuniversal, and to some degree computationally complex.

cond-mat.stat-mech↗

arXiv1997

Are galaxy distributions scale invariant? A perspective from dynamical systems theory

Unless there is evidence for fractal scaling with a single exponent over distances .1 <= r <= 100 h^-1 Mpc then the widely accepted notion of scale invariance of the correlation integral for .1 <= r <= 10 h^-1 Mpc must be questioned. The attempt to extract a scaling exponent νfrom the correlation integral n(r) by plotting log(n(r)) vs. log(r) is unreliable unless the underlying point set is approximately monofractal. The extraction of a spectrum of generalized dimensions ν_q from a plot of the correlation integral generating function G_n(q) by a similar procedure is probably an indication that G_n(q) does not scale at all. We explain these assertions after defining the term multifractal, mutually--inconsistent definitions having been confused together in the cosmology literature. Part of this confusion is traced to a misleading speculation made earlier in the dynamical systems theory literature, while other errors follow from confusing together entirely different definitions of ``multifractal'' from two different schools of thought. Most important are serious errors in data analysis that follow from taking for granted a largest term approximation that is inevitably advertised in the literature on both fractals and dynamical systems theory.

astro-ph↗