The classical derivation of the well-known Vasicek model for interest rates is reformulated
in terms of the associated pricing kernel. An advantage of the pricing kernel method
is that it allows one to generalize the construction to the Levy-Vasicek case, avoiding
issues of market incompleteness. In the Levy-Vasicek model the short rate is taken in the
real-world measure to be a mean-reverting process with a general one-dimensional Levy
driver admitting exponential moments. Expressions are obtained for the Levy-Vasicek
bond prices and interest rates, along with a formula for the return on a unit investment
in the long bond, defined by Lt = limT1 PtT =P0T , where PtT is the price at time t of
a T-maturity discount bond. We show that the pricing kernel of a Levy-Vasicek model
is uniformly integrable if and only if the long rate of interest is strictly positive.
An elementary `quantum-mechanical' derivation of the conditions for a system of
functions to form a Riesz basis of a Hilbert space on a finite interval is presented.
We introduce a family of operations in quantum mechanics that one can regard as "universal quantum measurements" (UQMs). These measurements are applicable to all finite dimensional quantum systems and entail the specification of only a minimal amount of structure. The first class of UQM that we consider involves the specification of the initial state of the system?no further structure is brought into play. We call operations of this type "tomographic measurements", since given the statistics of the outcomes one can deduce the original state of the system. Next, we construct a disentangling operation, the outcome of which, when the procedure is applied to a general mixed state of an entangled composite system, is a disentangled product of pure constituent states. This operation exists whenever the dimension of the Hilbert space is not a prime, and can be used to model the decay of a composite system. As another example, we show how one can make a measurement of the direction along which the spin of a particle of spin s is oriented (s = 1/2, 1,...). The required additional structure in this case involves the embedding of CP1 as a rational curve of degree 2s in CP2s.
A quantum navigation problem concerns the identification of a time-optimal Hamiltonian that realizes a required quantum process or task, under the influence of a prevailing 'background' Hamiltonian that cannot be manipulated. When the task is to transform one quantum state into another, finding the solution in closed form to the problem is nontrivial even in the case of time-independent Hamiltonians. An elementary solution, based on trigonometric analysis, is found here when the Hilbert space dimension is two. Difficulties arising from generalizations to higher-dimensional systems are discussed.
If X and Y are independent, Y and Z are independent, and so are X and Z, one might be tempted to conclude that X, Y, and Z are independent. But it has long been known in classical probability theory that, intuitive as it may seem, this is not true in general. In quantum mechanics one can ask whether analogous statistics can emerge for configurations of particles in certain types of entangled states. The explicit construction of such states, along with the specification of suitable sets of observables that have the purported statistical properties, is not entirely straightforward. We show that an example of such a configuration arises in the case of an N-particle GHZ state, and we are able to identify a family of observables with the property that the associated measurement outcomes are independent for any choice of $2,3,\ldots ,N-1$ of the particles, even though the measurement outcomes for all N particles are not independent. Although such states are highly entangled, the entanglement turns out to be 'fragile', i.e. the associated density matrix has the property that if one traces out the freedom associated with even a single particle, the resulting reduced density matrix is separable.
In the information-based approach to asset pricing, the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market then determines the overall magnitude of asset volatility. By letting this information flow rate random, we obtain an elementary stochastic volatility model within the information-based approach. Such an extension is justified on account of the fact that in real markets information flow rates are rarely measurable. Effects of having a random information flow rate are investigated in detail in the context of a simple model setup. Specifically, the price process of an elementary defaultable bond is derived, and its characteristic behaviours are revealed via simulation studies. The price of a European-style option on the bond is worked out, showing that the model has a sufficient flexibility to fit volatility surface. As an extension of the random information flow model, modelling of price manipulation is considered. A simple model is used to show how the skewness of the manipulated and unmanipulated price processes take opposite signature.
For nearly two decades, much research has been carried out on properties of physical systems described by Hamiltonians that are not Hermitian in the conventional sense, but are symmetric under space-time reflection; that is, they exhibit PT symmetry. Such Hamiltonians can be used to model the behavior of closed quantum systems, but they can also be replicated in open systems for which gain
and loss are carefully balanced, and this has been implemented in laboratory experiments for a wide range of systems. Motivated by these ongoing research activities,
we investigate here a particular theoretical aspect of the subject by unraveling the geometric structures of Hilbert spaces endowed with the parity and time-reversal operations, and analyze the characteristics of PT -symmetric Hamiltonians. A canonical relation between a PT -symmetric operator and a Hermitian operator is established in a geometric setting. The quadratic form corresponding to the parity operator, in particular, gives rise to a natural partition of the Hilbert space into two halves corresponding to states having positive and negative PT norm. Positive definiteness of the norm can be restored by introducing a conjugation operator C ; this leads to a positive-definite inner product in terms of CPT conjugation.
The quantum navigation problem of finding the time-optimal control Hamiltonian that transports a given initial state to a target state through quantum wind, that is, under the influence of external fields or potentials, is analyzed. By lifting the problem from the state space to the space of unitary gates realizing the required task, we are able to deduce the form of the solution to the problem by deriving a universal quantum speed limit. The expression thus obtained indicates that further simplifications of this apparently difficult problem are possible if we switch to the interaction picture of quantum mechanics. A complete solution to the navigation problem for an arbitrary quantum system is then obtained, and the behaviour of the solution is illustrated in the case of a two-level system.
If a Hamiltonian of a quantum system is symmetric under space-time reflection, then the associated eigenvalues can be real. A conjugation operation for quantum states can then be defined in terms of space-time reflection, but the resulting Hilbert space inner product is not positive definite and gives rise to an interpretational difficulty. One way of resolving this difficulty is to introduce a superselection rule that excludes quantum states having negative norms. It is shown here that a quantum theory arising in this way gives an example of Kibble?s nonlinear quantum mechanics, with the property that the state space has a constant negative curvature. It then follows from the positive curvature theorem that the resulting quantum theory is not physically viable. This conclusion also has implications to other quantum theories obtained from the imposition of analogous superselection rules.
The Wiener chaos approach to interest-rate modeling arises from the observation that in the general context of an arbitrage-free model with a Brownian filtration, the pricing kernel admits a representation in terms of the conditional variance of a square-integrable generator, which in turn admits a chaos expansion. When the expansion coefficients of the random generator factorize into multiple copies of a single function, the resulting interest-rate model is called "coherent", whereas a generic interest-rate model is necessarily "incoherent". Coherent representations are of fundamental importance because an incoherent generator can always be expressed as a linear superposition of coherent elements. This property is exploited to derive general expressions for the pricing kernel and the associated bond price and short rate processes in the case of a generic nth order chaos model, for each n ? ?. Pricing formulae for bond options and swaptions are obtained in closed form for a number of examples. An explicit representation for the pricing kernel of a generic incoherent model is then obtained by use of the underlying coherent elements. Finally, finite-dimensional realizations of coherent chaos models are investigated and we show that a class of highly tractable models can be constructed having the characteristic feature that the discount bond price is given by a piecewise-flat (simple) process.
In certain circumstances tools of Riemannian geometry are sufficient to address questions arising in the more general Finslerian context. We show that one such instance presents itself in the characterisation of geodesics in Randers spaces of constant flag curvature. To achieve a simple, Riemannian derivation of this special family of curves, we exploit the connection between Randers spaces and the Zermelo problem of time-optimal navigation in the presence of background fields. The characterisation of geodesics is then proven by generalising an intuitive argument developed recently for the solution of the quantum Zermelo problem.
A model for the thermodynamics of a quantum heat bath is introduced. Under the assumption that the bath molecules have finitely many degrees of freedom and are weakly interacting, we present a general derivation of the equation of state of the bath in the thermodynamic limit. The relation between the temperature and the specific energy of the bath depends on (i) the spectral properties of the molecules, and (ii) the choice of probability measure on the state space of a representative molecule. The results obtained illustrate how the microscopic features of the molecular constituents determine the macroscopic thermodynamic properties of the bath. Our findings can thus be used to compare the merits of different hypotheses for the equilibrium states of quantum systems. Two examples of plausible choices for the probability measure are considered in detail.
The differential-equation eigenvalue problem associated with a recently-introduced Hamiltonian, whose eigenvalues correspond to the zeros of the Riemann zeta function, is analyzed using Fourier and WKB analysis. The Fourier analysis leads to a challenging open problem concerning the formulation of the eigenvalue problem in the momentum space. The WKB analysis gives the exact asymptotic behavior of the eigenfunction.
In recent reports, suggestions have been put forward to the effect that parity and time-reversal (PT) symmetry in quantum mechanics is incompatible with causality. It is shown here, in contrast, that PT-symmetric quantum mechanics is fully consistent with standard quantum mechanics. This follows from the surprising fact that the much-discussed metric operator on Hilbert space is not physically observable. In particular, for closed quantum systems in finite dimensions there is no statistical test that one can perform on the outcomes of measurements to determine whether the Hamiltonian is Hermitian in the conventional sense, or PT-symmetric?the two theories are indistinguishable. Nontrivial physical effects arising as a consequence of PT symmetry are expected to be observed, nevertheless, for open quantum systems with balanced gain and loss.
The well-known theorem of Dybvig, Ingersoll, and Ross shows that the long zero-coupon rate can never fall. This result, which, although undoubtedly correct, has been regarded by many as surprising, stems from the implicit assumption that the long-term discount function has an exponential tail. We revisit the problem in the setting of modern interest rate theory, and show that if the long ?simple? interest rate (or Libor rate) is ?nite, then this rate (unlike the zero-coupon rate) acts viably as a state variable,the value of which can ?uctuate randomly in line with other economic indicators. New interest rate models are constructed, under this hypothesis and certain generalizations thereof, that illustrate explicitly the good asymptotic behavior of the resulting discount bond systems. The conditions necessary for the existence of such ?hyperbolic? and ?generalized hyperbolic? long rates are those of so-called social discounting, which allow for long-term cash ?ows to be treated as broadly ?just as important? as those of the short or medium term. As a consequence, we are able to provide a consistent arbitrage-free valuation framework for the cost-bene?t analysis and risk management of long-term social projects, such as those associated with sustainable energy, resource conservation, and climate change