arXiv subjects

Louis Paulot

Publications and source records attributed to Louis Paulot.

15 recordsLinked to original sources

arXiv2016

Asymptotic Implied Volatility at the Second Order with Application to the SABR Model

We provide a general method to compute a Taylor expansion in time of implied volatility for stochastic volatility models, using a heat kernel expansion. Beyond the order 0 implied volatility which is already known, we compute the first order correction exactly at all strikes from the scalar coefficient of the heat kernel expansion. Furthermore, the first correction in the heat kernel expansion gives the second order correction for implied volatility, which we also give exactly at all strikes. As an application, we compute this asymptotic expansion at order 2 for the SABR model.

q-fin.PR↗

arXiv2016

Unbiased Monte Carlo Simulation of Diffusion Processes

Monte Carlo simulations of diffusion processes often introduce bias in the final result, due to time discretization. Using an auxiliary Poisson process, it is possible to run simulations which are unbiased. In this article, we propose such a Monte Carlo scheme which converges to the exact value. We manage to keep the simulation variance finite in all cases, so that the strong law of large numbers guarantees the convergence. Moreover, the simulation noise is a decreasing function of the Poisson process intensity. Our method handles multidimensional processes with nonconstant drifts and nonconstant variance-covariance matrices. It also encompasses stochastic interest rates.

q-fin.CP↗

arXiv2014

Parallel American Monte Carlo

In this paper we introduce a new algorithm for American Monte Carlo that can be used either for American-style options, callable structured products or for computing counterparty credit risk (e.g. CVA or PFE computation). Leveraging least squares regressions, the main novel feature of our algorithm is that it can be fully parallelized. Moreover, there is no need to store the paths and the payoff computation can be done forwards: this allows to price structured products with complex path and exercise dependencies. The key idea of our algorithm is to split the set of paths in several subsets which are used iteratively. We give the convergence rate of the algorithm. We illustrate our method on an American put option and compare the results with the Longstaff-Schwartz algorithm.

q-fin.CP↗

arXiv2013

Arbitrage-Free Pricing Before and Beyond Probabilities

"Fundamental theorem of asset pricing" roughly states that absence of arbitrage opportunity in a market is equivalent to the existence of a risk-neutral probability. We give a simple counterexample to this oversimplified statement. Prices are given by linear forms which do not always correspond to probabilities. We give examples of such cases. We also show that arbitrage freedom is equivalent to the continuity of the pricing linear form in the relevant topology. Finally we analyze the possible loss of martingality of asset prices with lognormal stochastic volatility. For positive correlation martingality is lost when the financial process is modelled through standard probability theory. We show how to recover martingality using the appropriate mathematical tools.

q-fin.PR↗

arXiv2010

One-Dimensional Pricing of CPPI

Constant Proportion Portfolio Insurance (CPPI) is an investment strategy designed to give participation in the performance of a risky asset while protecting the invested capital. This protection is however not perfect and the gap risk must be quantified. CPPI strategies are path-dependent and may have American exercise which makes their valuation complex. A naive description of the state of the portfolio would involve three or even four variables. In this paper we prove that the system can be described as a discrete-time Markov process in one single variable if the underlying asset follows a homogeneous process. This yields an efficient pricing scheme using transition probabilities. Our framework is flexible enough to handle most features of traded CPPIs including profit lock-in and other kinds of strategies with discrete-time reallocation.

q-fin.PR↗

arXiv2009

A Dynamic Model for Credit Index Derivatives

We present a new model for credit index derivatives, in the top-down approach. This model has a dynamic loss intensity process with volatility and jumps and can include counterparty risk. It handles CDS, CDO tranches, Nth-to-default and index swaptions. Using properties of affine models, we derive closed formulas for the pricing of index CDS, CDO tranches and Nth-to-default. For index swaptions, we give an exact pricing and an approximate faster method. We finally show calibration results on 2009 market data.

q-fin.PR↗

arXiv2009

Efficient Pricing of CPPI using Markov Operators

Constant Proportion Portfolio Insurance (CPPI) is a strategy designed to give participation in a risky asset while protecting the invested capital. Some gap risk due to extreme events is often kept by the issuer of the product: a put option on the CPPI strategy is included in the product. In this paper we present a new method for the pricing of CPPIs and options on CPPIs, which is much faster and more accurate than the usual Monte-Carlo method. Provided the underlying follows a homogeneous process, the path-dependent CPPI strategy is reformulated into a Markov process in one variable, which allows to use efficient linear algebra techniques. Tail events, which are crucial in the pricing are handled smoothly. We incorporate in this framework linear thresholds, profit lock-in, performance coupons... The American exercise of open-ended CPPIs is handled naturally through backward propagation. Finally we use our pricing scheme to study the influence of various features on the gap risk of CPPI strategies.

q-fin.CP↗

arXiv2006

Infinite-Dimensional Gauge Structure of d=2 N=16 Supergravity

Dimensional reduction of maximal supergravity to two dimensions leads to an infinite-dimensional (non-local) symmetry group W x E_9 which has a simpler action when the bosonic fields are dualised to an infinite tower of dual potentials. We construct a doubled-valued representation of its compact subgroup K x K(E_9) and we show that off-shell fermions take place in this infinite-dimensional representation. The equations of motion can be written in a fully gauge-covariant way as a selfduality condition for the infinite-dimensional fields. The W x E_9 global symmetry is thus manifest. The linear system associated to the theory is recovered in a triangular gauge. Finally we provide supersymmetry transformations for off-shell fields.

hep-th↗

arXiv2005

Hidden Symmetries and Dirac Fermions

In this paper, two things are done. First, we analyze the compatibility of Dirac fermions with the hidden duality symmetries which appear in the toroidal compactification of gravitational theories down to three spacetime dimensions. We show that the Pauli couplings to the p-forms can be adjusted, for all simple (split) groups, so that the fermions transform in a representation of the maximal compact subgroup of the duality group G in three dimensions. Second, we investigate how the Dirac fermions fit in the conjectured hidden overextended symmetry G++. We show compatibility with this symmetry up to the same level as in the pure bosonic case. We also investigate the BKL behaviour of the Einstein-Dirac-p-form systems and provide a group theoretical interpretation of the Belinskii-Khalatnikov result that the Dirac field removes chaos.

hep-th↗

arXiv2004

Selfduality of d=2 Reduction of Gravity Coupled to a Sigma-Model

Dimensional reduction in two dimensions of gravity in higher dimension, or more generally of d=3 gravity coupled to a sigma-model on a symmetric space, is known to possess an infinite number of symmetries. We show that such a bidimensional model can be embedded in a covariant way into a sigma-model on an infinite symmetric space, built on the semidirect product of an affine group by the Witt group. The finite theory is the solution of a covariant selfduality constraint on the infinite model. It has therefore the symmetries of the infinite symmetric space. (We give explicit transformations of the gauge algebra.) The usual physical fields are recovered in a triangular gauge, in which the equations take the form of the usual linear systems which exhibit the integrable structure of the models. Moreover, we derive the constraint equation for the conformal factor, which is associated to the central term of the affine group involved.

hep-th↗

arXiv2004

Superconformal Selfdual Sigma-Models

A range of bosonic models can be expressed as (sometimes generalized) $σ$-models, with equations of motion coming from a selfduality constraint. We show that in D=2, this is easily extended to supersymmetric cases, in a superspace approach. In particular, we find that the configurations of fields of a superconformal $\mathfrak{G}/\mathfrak{H}$ coset models which satisfy some selfduality constraint are automatically solutions to the equations of motion of the model. Finally, we show that symmetric space $σ$-models can be seen as infinite-dimensional $\tfG/\tfH$ models constrained by a selfduality equation, with $\tfG$ the loop extension of $\mathfrak{G}$ and $\tfH$ a maximal subgroup. It ensures that these models have a hidden global $\tfG$ symmetry together with a local $\tfH$ gauge symmetry.

hep-th↗

arXiv2004

Cosmological billiards and oxidation

We show how the properties of the cosmological billiards provide useful information (spacetime dimension and $p$-form spectrum) on the oxidation endpoint of the oxidation sequence of gravitational theories. We compare this approach to the other available methods: $GL(n,R)$ subgroups and the superalgebras of dualities.

hep-th↗

arXiv2003

Real Borcherds Superalgebras and M-theory

The correspondence between del Pezzo surfaces and field theory models over the complex numbers or for split real forms is extended to other real forms, in particular to those compatible with supersymmetry. Specifically, all theories of the Magic triangle that reduce to the pure supergravities in four dimensions correspond to singular real del Pezzo surfaces and the same is true for the Magic square of N=2 SUGRAS. A real del Pezzo surface is the invariant set under an antilinear involution of a complex one. This conjugation induces an involution of the Picard group that preserves the anticanonical class and the intersection form. The known non-split U-duality algebras are embedded into superBorcherds algebras defined by their Cartan matrix (minus the intersection form) and fixed by the anti-involution. These data may be described by Tits-Satake bicoloured diagrams. As in the split case, oxidation results from blowing down disjoint real P^1's of self-intersection -1. The singular del Pezzo surfaces of interest are obtained by degenerating regular surfaces upon contraction of real curves of self-intersection -2. We use the finite classification of real simple singularities to exhibit the relevant normal surfaces. We also give a general construction of more magic triangles like a type I split magic triangle and prove their (approximate) symmetry with respect to their diagonal, this symmetry argument was announced in our previous paper for the split case.

hep-th↗

arXiv2003

Symmetries in M-theory: Monsters, Inc

We will review the algebras which have been conjectured as symmetries in M-theory. The Borcherds algebras, which are the most general Lie algebras under control, seem natural candidates.

hep-th↗

arXiv2002

Borcherds symmetries in M-theory

It is well known but rather mysterious that root spaces of the $E_k$ Lie groups appear in the second integral cohomology of regular, complex, compact, del Pezzo surfaces. The corresponding groups act on the scalar fields (0-forms) of toroidal compactifications of M theory. Their Borel subgroups are actually subgroups of supergroups of finite dimension over the Grassmann algebra of differential forms on spacetime that have been shown to preserve the self-duality equation obeyed by all bosonic form-fields of the theory. We show here that the corresponding duality superalgebras are nothing but Borcherds superalgebras truncated by the above choice of Grassmann coefficients. The full Borcherds' root lattices are the second integral cohomology of the del Pezzo surfaces. Our choice of simple roots uses the anti-canonical form and its known orthogonal complement. Another result is the determination of del Pezzo surfaces associated to other string and field theory models. Dimensional reduction on $T^k$ corresponds to blow-up of $k$ points in general position with respect to each other. All theories of the Magic triangle that reduce to the $E_n$ sigma model in three dimensions correspond to singular del Pezzo surfaces with $A_{8-n}$ (normal) singularity at a point. The case of type I and heterotic theories if one drops their gauge sector corresponds to non-normal (singular along a curve) del Pezzo's. We comment on previous encounters with Borcherds algebras at the end of the paper.

hep-th↗