format: text

text:
# Self-similar collapse of a scalar field in dilaton gravity and critical behaviour

## 1 Introduction

Critical phenomena in gravitational collapse have attracted much interest since the pioneering work by Choptuik  and they are considered to be one of the greatest successes of the numerical relativity. The essence of the critical phenomena consists in the fact that, just at the threshold of the black hole formation, the field dynamics becomes simple and exhibits discrete or continuous self-similarity despite the nature and non-linearity of the collapsing matter. The critical solution separates the solutions with a black hole formed from those without a formation of a black hole. The mass of a black hole formed in near critical collapse obeys the power law

$$M_{BH}=C(pp_{cr})^\gamma $$
(1)
where the parameter $`p`$ describes the strength of the initial data and $`p_{cr}`$ is its critical value.The exponent $`\gamma `$ is, in general, matter dependent and $`C`$ is a constant which depends on the initial field configuration. For detail discussion of the critical phenomena we refer the reader to the Gundlach’s review  and references therein.

Parallel to the numerical investigations , an analytical approach has been undertaken in order to understand more deeply the critical collapse. Although fascinating, this task was proved to be very difficult. The analytical approach is based on approximate (perturbative) techniques or exact toy models which cannot be considered as completely realistic and satisfactory. Nevertheless, the analytical methods, and especially the exact solutions provide valuable independent insight into the subject. It was realized by Brady  and Oshiro, Nakamura and Tomimatsu  that the one parameter family of exact self-similar real massless scalar-field solutions first discovered by Roberts111It turns out that the original Roberts’s solution as presented in  solves the field equations only for one nontrivial case and represents just a class of measure zero among the solutions to the spherically symmetric homothetic Einstein-scalar field equations given in ,  and . For detail discussion see  where the Roberts’s solution is generalized. I would like to thank L. Burko for pointing me this out.   can be applied to explain some basic features of the critical collapse. Solutions from this family with $`p>1`$ describe the formation of a black hole and to the leading order around the critical value $`p_{cr}=1`$ the black hole mass turns out to be $`M(p1)^{1/2}`$. The critical exponent in this toy model is therefore $`\gamma =1/2`$ and is slightly different from the numerically calculated value $`\gamma =0.37`$. In order to gain as much as possible insight into the critical phenomena, some exact toy models in three dimensions were also considered , .

Critical collapse within the scalar-tensor theories has attracted some interest, too ,. There were also some analytical works on the critical collapse in Brans-Dicke theory and the theory with conformal coupling ,,. Using conformally transformed Roberts’s solutions the authors were able to find analytically the black hole mass power law and to extract the critical exponent which turns out to be $`\gamma =1/2\pm 1/2\sqrt{2\omega +3}`$ and $`\gamma =0.21`$ for the Brans-Dicke and the theory with conformal coupling, respectively.

However, there are serious omissions in the works treating analytically critical collapse in scalar-tensor theories. First, only two theories were considered. Second, the authors have considered simplified models where the matter fields are absent (dilaton-vacuum solutions) i.e. the collapsing matter has been taken to be the dilaton field. The aim of the present work is to fill in this gap studying analytically the critical collapse of a massless real scalar field within the scalar-tensor theories of gravity. Our study is based on exact solutions which generalize Roberts’s solution in the presence of a dilaton field.

## 2 Exact self-similar solutions

The general form of the extended gravitational action in scalar-tensor theories is

$`S={\displaystyle \frac{1}{16\pi G_{}}}{\displaystyle }d^4x\sqrt{\stackrel{~}{g}}(F(\mathrm{\Phi })\stackrel{~}{R}Z(\mathrm{\Phi })\stackrel{~}{g}^{\mu \nu }_\mu \mathrm{\Phi }_\nu \mathrm{\Phi }`$
$`2U(\mathrm{\Phi }))+S_m[\mathrm{\Psi }_m;\stackrel{~}{g}_{\mu \nu }].`$ (2)
Here, $`G_{}`$ is the bare gravitational constant, $`\stackrel{~}{R}`$ is the Ricci scalar curvature with respect to the space-time metric $`\stackrel{~}{g}_{\mu \nu }`$. The dynamics of the scalar field $`\mathrm{\Phi }`$ depends on the functions $`F(\mathrm{\Phi })`$, $`Z(\mathrm{\Phi })`$ and $`U(\mathrm{\Phi })`$. In order for the gravitons to carry positive energy the function $`F(\mathrm{\Phi })`$ must be positive. The nonnegativity of the energy of the dilaton field requires that $`2F(\mathrm{\Phi })Z(\mathrm{\Phi })+3[dF(\mathrm{\Phi })/d\mathrm{\Phi }]^20`$. The action of matter depends on the material fields $`\mathrm{\Psi }_m`$ and the space-time metric $`\stackrel{~}{g}_{\mu \nu }`$.

However, it is much more convenient from a mathematical point of view to analyze the scalar-tensor theories with respect to the conformally related Einstein frame given by the metric:

$$g_{\mu \nu }=F(\mathrm{\Phi })\stackrel{~}{g}_{\mu \nu }.$$
(3)
Further, let us introduce the scalar field $`\phi `$ (the so called dilaton) via the equation

$$\left(\frac{d\phi }{d\mathrm{\Phi }}\right)^2=\frac{3}{4}\left(\frac{d\mathrm{ln}(F(\mathrm{\Phi }))}{d\mathrm{\Phi }}\right)^2+\frac{Z(\mathrm{\Phi })}{2F(\mathrm{\Phi })}$$
(4)
and define

$$𝒜(\phi )=F^{1/2}(\mathrm{\Phi }),2V(\phi )=U(\mathrm{\Phi })F^2(\mathrm{\Phi }).$$

In the Einstein frame action (2) takes the form

$`S={\displaystyle \frac{1}{16\pi G_{}}}{\displaystyle d^4x\sqrt{g}\left(R2g^{\mu \nu }_\mu \phi _\nu \phi 4V(\phi )\right)}`$
$`+S_m[\mathrm{\Psi }_m;𝒜^2(\phi )g_{\mu \nu }]`$ (5)
where $`R`$ is the Ricci scalar curvature with respect to the Einstein metric $`g_{\mu \nu }`$.

In what follows we shall consider the case $`U(\mathrm{\Phi })=0`$ and the matter source will be a massless real scalar field $`\sigma `$.

The starting point in our considerations is the Roberts’s solution which is written as

$`ds^2`$ $`=`$ $`dudv+r^2(u,v)d\mathrm{\Omega }^2,`$ (6)
$`\sigma _0`$ $`=`$ $`\pm {\displaystyle \frac{1}{2}}\mathrm{ln}\left({\displaystyle \frac{u(1+p)v}{u(1p)v}}\right),`$ (7)
where

$$r^2(u,v)=\frac{1}{4}[u(1p)v][u(1+p)v]$$

and $`p>0`$ is an arbitrary constant.

Dilaton-vacuum solutions can be easily obtained via the conformal transformation

$`F^1(\mathrm{\Phi }_{dv}(u,v))=𝒜^2(\phi )|_{\phi =\sigma _0(u,v)},`$ (8)
$`d\stackrel{~}{s}_{dv}^2=F^1(\mathrm{\Phi }_{dv}(u,v))ds^2.`$ (9)
This simple procedure, however, is not applicable when a matter source is present. In order to construct exact scalar-tensor solutions describing a collapsing scalar field we shall employ the solution generating methods developed in . Roberts’s solution is taken as a seed solution.

The general form of the scalar-tensor solutions is given by

$`F^1[\mathrm{\Phi }(u,v)]`$ $`=`$ $`F^1[\mathrm{\Phi }(\sigma _0(u,v))]=𝒜^2[\phi (\sigma _0(u,v))],`$ (10)
$`d\stackrel{~}{s}^2`$ $`=`$ $`F^1[\mathrm{\Phi }(\sigma _0)]ds^2=F^1[\mathrm{\Phi }(\sigma _0)]dudv+\stackrel{~}{r}^2(u,v)d\mathrm{\Omega }^2,`$ (11)
$`\sigma (u,v)`$ $`=`$ $`\sigma (\sigma _0(u,v)),`$ (12)
where

$$\stackrel{~}{r}^2(u,v)=F^1[\mathrm{\Phi }(\sigma _0)]r^2(u,v)$$
(13)
and the explicit form of the functions $`F^1(\mathrm{\Phi }(\sigma _0))`$ and $`\sigma (\sigma _0)`$ depends on the particular scalar-tensor theory. Below we consider several examples of scalar-tensor theories which qualitatively cover the general case and have solutions representable in a closed analytical form.

The solutions above are continuously self-similar since they admit the homothetic Killing vector

$$\xi =u\frac{}{u}+v\frac{}{v}.$$
(14)
The Ricci scalar curvature $`\stackrel{~}{R}`$ is given by

$$\stackrel{~}{R}=F(\mathrm{\Phi }(\sigma _0))\left(1+\frac{3}{2}\frac{d^2}{d\sigma _0^2}\mathrm{ln}\left[F(\mathrm{\Phi }(\sigma _0))\right]\frac{3}{4}\left(\frac{d}{d\sigma _0}\mathrm{ln}\left[F(\mathrm{\Phi }(\sigma _0))\right]\right)^2\right)R$$
(15)
where

$$R=\frac{p^2uv}{2r^4(u,v)}$$
(16)
is the Ricci scalar curvature for the Roberts’s solution.

For all solutions we present here the conformal factor $`F^1(\mathrm{\Phi })`$ satisfies $`F^1(\mathrm{\Phi })\lambda ^2>0`$ where $`\lambda `$ is a constant. Therefore, the conformal factor is everywhere regular except at $`r(u,v)=0`$ where the only singularity222For all scalar-tensor solutions presented here it can be checked that $`\stackrel{~}{R}`$ could become singular only for $`R`$.  of the Ricci scalar curvature is located. Thus we can conclude that the causal structure of the scalar-tensor solutions is the same as the Roberts’s solution. The singularity $`r(u,v)=0`$ is given by $`u=(1p)v`$ and $`u=(1+p)v`$ for $`v>0`$ and $`v<0`$, respectively. For $`0<p<1`$ the singularity is timelike while it is null for $`p=1`$. When $`p>1`$ the singularity is spacelike in the region $`v>0`$ and timelike for $`v<0`$.

In all cases we consider, an apparent horizon exists only for $`p>1`$ and it surrounds the spacelike singularity while the timelike singularity is naked. In order to get rid of the naked singularity we shall proceed as in the case of the Roberts’s solution. We can replace the region $`v<0`$ by a flat spacetime smoothly matched to the region $`v>0`$ across the $`v=0`$ line where the energy flux vanishes in both the Jardan and Einstein frame.

The fact that the spacelike singularity is hidden behind and apparent horizon signals the formation of a black hole. That is why we shall consider bellow the case $`p>1`$ in the limit $`p1`$.

With regard to the case $`0<p<1`$, we can, just as for the Roberts’s solutoin, remove the timelike singularity by replacing the region $`u>0`$ and $`v>0`$ by a flat spacetime. For $`0<p<1`$ the initial conditions are not strong enough to form a black hole.

The above considerations show that the parameter $`p`$ is a control parameter and its critical value is $`p_{cr}=1`$. Thus the presented solutions can be divided into three classes: subcritical ($`0<p<1`$) , critical ($`p=1`$) and supercritical ($`p>1`$).

### 2.1 Brans-Dicke theory

Brans-Dicke theory is described by the functions $`F(\mathrm{\Phi })=\mathrm{\Phi }`$ and $`Z(\mathrm{\Phi })=\omega /\mathrm{\Phi }`$ where $`\omega `$ is a constant. Here we shall consider the cases with $`\omega >0`$.

Solution generating transformations  give the following scalar-tensor solution:

$`\mathrm{\Phi }^1(u,v)`$ $`=`$ $`\lambda ^2\mathrm{cosh}^2\left({\displaystyle \frac{\sigma _0(u,v)}{\sqrt{3+2\omega }}}\right),`$ (17)
$`\sigma (u,v)`$ $`=`$ $`{\displaystyle \frac{\sqrt{3+2\omega }}{\lambda }}\mathrm{tanh}\left({\displaystyle \frac{\sigma _0(u,v)}{\sqrt{3+2\omega }}}\right),`$ (18)
where $`0<\lambda ^2<\mathrm{}`$.

The apparent horizon exist only for $`p>1`$ and is located at

$$u\frac{2(1p)}{1\pm \frac{1}{\sqrt{3+2\omega }}}v.$$
(19)
Here and below, in order to present the results in compact and clear form the location of the apparent horizon is determined for $`(p1)<<1`$. The effective gravitational mass inside the apparent horizon is

$$\stackrel{~}{M}_{AH}=\frac{1}{2}\stackrel{~}{r}_{AH}\frac{\sqrt{2}}{8}|\lambda |\left(\frac{1\frac{1}{\sqrt{3+2\omega }}}{1\pm \frac{1}{\sqrt{3+2\omega }}}\right)^{1/2}\left(p1\right)^{1/21/2\sqrt{3+2\omega }}v.$$
(20)
As well know the self-similar spacetimes are not asymptotically flat and the black hole mass diverges when $`v\mathrm{}`$. The standard way to get rid of this problem is to truncate the spacetime at some $`v_{}>0`$ and to add an asymptotically flat region. We shall accept from now on that this has been done.

What is important is that the black hole mass obeys the power law. Hence the analytically calculated critical exponent is found to be $`\gamma =\frac{1}{2}\frac{1}{2\sqrt{3+2\omega }}`$. In contrast to the dilaton-vacuum case where $`\gamma _{dv}=1\pm \frac{1}{2\sqrt{3+2\omega }}`$ ,  , in the presence of a massless scalar field as a matter source, only the minus sign is allowed.

### 2.2 Theory with conformal coupling

This theory is described by the functions $`F(\mathrm{\Phi })=1\frac{1}{6}\mathrm{\Phi }^2`$ and $`Z(\mathrm{\Phi })=1`$. The explicit functions in the case under consideration are:

$`F^1(\mathrm{\Phi }(u,v))=1+(1\lambda ^2)\mathrm{sinh}^2\left({\displaystyle \frac{\sigma _0(u,v)}{\sqrt{3}}}\right),`$ (21)
$`\sigma (u,v)=\sqrt{3}\mathrm{tanh}^1\left(\lambda \mathrm{tanh}\left({\displaystyle \frac{\sigma _0(u,v)}{\sqrt{3}}}\right)\right),`$ (22)
where the parameter $`\lambda `$ is restricted by $`0<\lambda ^2<1`$.

The apparent horizon exists for $`p>1`$ and is located at

$$u\frac{2(1p)}{1\pm \frac{1}{\sqrt{3}}}v$$
(23)
The mass inside the apparent horizon is

$$\stackrel{~}{M}_{AH}\frac{\sqrt{2}}{4}\left(1\lambda ^2\right)^{1/2}\left(\frac{1\frac{1}{\sqrt{3}}}{1\pm \frac{1}{\sqrt{3}}}\right)^{1/2}\left(p1\right)^{1/21/2\sqrt{3}}v_{}.$$
(24)
The critical exponent is $`\gamma =\frac{1}{2}\frac{1}{2\sqrt{3}}`$ and coincides with the previously calculated critical exponent $`\gamma _{dv}0.21`$ for the dilaton-vacuum solutions .

### 2.3 $`F(\mathrm{\Phi })=\mathrm{\Phi }`$ and $`Z(\mathrm{\Phi })=(\mathrm{\Phi }^23\mathrm{\Phi }+3)/2\mathrm{\Phi }(\mathrm{\Phi }1)`$ theory

The explicit form the functions $`\mathrm{\Phi }(\sigma _0)`$ and $`\sigma (\sigma _0)`$ is given by

$`\mathrm{\Phi }^1(u,v)`$ $`=`$ $`{\displaystyle \frac{\lambda ^2}{\lambda ^2+(1\lambda ^2)\mathrm{sin}^2\left(\lambda \sigma _0(u,v)\right)}},`$ (25)
$`\sigma (u,v)`$ $`=`$ $`{\displaystyle \frac{1+\lambda ^2}{2\lambda }}\sigma _0(u,v){\displaystyle \frac{1\lambda ^2}{4\lambda ^2}}\mathrm{sin}\left(2\lambda \sigma _0(u,v)\right).`$ (26)
The range of the parameter $`\lambda `$ is $`0<\lambda ^2<1`$.

The apparent horizon is located at

$$u\frac{2(1p)}{1\pm D_\lambda (p)}v$$
(27)
where

$$D_\lambda (p)=\frac{1}{2}\frac{\lambda (1\lambda ^2)\mathrm{sin}\left(\lambda \mathrm{ln}(p1)\right)}{\lambda ^2+(1\lambda ^2)\mathrm{sin}^2\left(\frac{1}{2}\lambda \mathrm{ln}(p1)\right)}$$
(28)
and $`D_\lambda ^2(p)<1`$.

The mass inside the apparent horizon is given by

$$\stackrel{~}{M}_{AH}\frac{2^{1/2}}{4}\frac{\lambda }{\sqrt{\lambda ^2+(1\lambda ^2)\mathrm{sin}^2\left(\frac{1}{2}\lambda \mathrm{ln}(p1)\right)}}\left(\frac{1D_\lambda (p)}{1\pm D_\lambda (p)}\right)^{1/2}(p1)^{1/2}v_{}.$$
(29)
We see something interesting. The power law $`M=const(pp_{cr})^\gamma `$ observed within the general relativity is slightly modified: $`M=f(pp_{cr})(pp_{cr})^\gamma `$. It is also seen that the black hole mass exhibits ” damping oscillations” in the control parameter $`p`$ when $`p1`$.

If we define the critical exponent as $`\gamma =lim_{p1}\mathrm{ln}(M)/\mathrm{ln}(p1)`$ we obtain $`\gamma =1/2`$ for the case under consideration.

It is also interesting to find the black hole mass law for the dilaton-vacuum collapse. Using solution generating formulas (8) one can show that

$`\stackrel{~}{M}_{AH}^{dv}{\displaystyle \frac{1}{\sqrt{2}}}{\displaystyle \frac{(p1)^{1/2}}{\mathrm{ln}(p1)}}v_{}.`$ (30)
Hence we find $`\gamma _{dv}=lim_{p1}\mathrm{ln}(M)/\mathrm{ln}(p1)=1/2`$.

We have checked that the black hole mass for the near critical collapse in the Barker’s theory ($`F(\mathrm{\Phi })=\mathrm{\Phi }`$ and $`Z(\mathrm{\Phi })=(43\mathrm{\Phi })/2\mathrm{\Phi }(\mathrm{\Phi }1)`$) exhibits ”damping oscillations” in the critical parameter, too. Since the Barker’s case is similar to the case under consideration we do not present detail calculations.

### 2.4 $`F(\mathrm{\Phi })=\mathrm{\Phi }`$ and $`Z(\mathrm{\Phi })=(13a^2\mathrm{\Phi })/2a^2\mathrm{\Phi }^2`$ theory

Here the parameter $`a`$ satisfies $`a>0`$.

In the case under consideration we have

$`\mathrm{\Phi }^1(u,v)=\left(1+a\sigma _0(u,v)\right)^2+\lambda ^2,`$ (31)
$`\sigma (u,v)={\displaystyle \frac{1}{a}}\mathrm{arcsin}\left({\displaystyle \frac{\lambda }{\sqrt{(1+a\sigma _0(u,v))^2+\lambda ^2}}}\right).`$ (32)
Here, $`\lambda `$ runs $`0<\lambda ^2<\mathrm{}`$.

The location of the apparent horizon is given by

$$u2(1p)v.$$
(33)
The mass inside the apparent horizon is

$$\stackrel{~}{M}_{AH}\frac{\sqrt{2}}{4}a\mathrm{ln}(p1)(p1)^{1/2}v_{}.$$
(34)
Hence, for the critical exponent we have $`\gamma =lim_{p1}\mathrm{ln}(M)/\mathrm{ln}(p1)=1/2`$.

Respectively, for the dilaton-vacuum collapse we obtain

$$\stackrel{~}{M}_{AH}^{dv}\frac{\sqrt{2}}{4}a\mathrm{ln}(p1)(p1)^{1/2}v_{}$$
(35)
and therefore $`\gamma _{dv}=\gamma =1/2`$.

## 3 Conclusion

In the present work we have generalized the general relativistic Roberts-Brady-Oshiro- Nakamura-Tomimatsu (RBONT) model in the case of scalar-tensor theories of gravity. We have presented new exact self-similar solutions describing a collapse of a massless scalar field in scalar-tensor theories. The solutions exhibit a type of critical behavior discussed by Choptuik. Three possible evolutions are distinguished: subcritical, critical and supercritical. For supercritical evolution the black hole mass low has been found and the critical exponent has been extract for several scalar- tensor theories which cover qualitatively the general case. It is interesting to note that for some scalar-tensor theories within the analytical models we consider, the black hole mass law in the near critical collapse is of the form $`M=f(pp_{cr})(pp_{cr})^\gamma `$ where $`f(pp_{cr})`$ is a function depending on the particular scalar-tensor theory. One sees that this law is slightly different compared to the general relativistic version $`M=const(pp_{cr})^\gamma `$. It is also interesting to note that, in some cases, the black hole mass exhibits ”damping oscillations” in the limit $`pp_{cr}`$.

As the RBONT model our models can not be considered as completely realistic but they are satisfactory enough in explaining analytically some basic features of the critical collapse.

## Acknowledgments

This work was supported in part by Sofia University Grant No 3429/2003.


text:
# Quantum nonlocality in the presence of superselection rules and data hiding protocols

(February 5, 2003)

## Abstract

We consider a quantum system subject to superselection rules, for which certain restrictions apply to the quantum operations that can be implemented. It is shown how the notion of quantum–nonlocality has to be redefined in the presence of superselection rules: there exist separable states that cannot be prepared locally and exhibit some form of nonlocality. Moreover, the notion of local distinguishability in the presence of classical communication has to be altered. This can be used to perform quantum information tasks that are otherwise impossible. In particular, this leads to the introduction of perfect quantum data hiding protocols, for which quantum communication (eventually in the form of a separable but nonlocal state) is needed to unlock the secret.

The laws of Quantum Mechanics allow us to carry certain tasks that would be impossible in a classical world. The strength of quantum information theory resides in a subtle interplay between the grandeur of the Hilbert space and the limitations on the allowed operations. One of the most prominent examples is quantum cryptography BB84 , where the existence of quantum superpositions or entangled states on one hand and the limitations due to the no-cloning theorem WZ82  on the other hand ensure the possibility of a secure transmission of information between two or more partners.

The power of quantum mechanics becomes especially apparent when natural limitations apply to the operations that one can apply. As an example, the theory of entanglement and quantum nonlocality arises from the restriction to local operations and classical communication (LOCC). It is somehow expected that additional constraints would lead to new interesting physics and applications, especially in the context of cryptography.

In many physical systems of interest, such an additional restriction applies in form of superselection rules: an extra *axiom* of quantum mechanics dictates the existence of superselection rules forbidding e.g. coherent superpositions between states of elementary particles with different electric charge WWW52 ; GP . In practice, energy constraints lead to effective superselection rules. We will consider a particular instance of a superselection rule, which is deeply motivated by current quantum optical experiments, namely particle number. This corresponds, for example, to the situation in which one has bosonic atoms as it is the case in experiments with cold atomic gases BEC . In this case, all physical observables (and hence states) commute with the particle number operator. Our results however also apply other types of superselection rules.

In this paper we will show that in the presence of superselection rules it is possible to carry out tasks which otherwise cannot be performed in the context of quantum information. The underlying cause appears to be that superselection rules completely alter the notion of local distinguishability of quantum states: it is not true anymore that any two pure orthogonal states can be distinguished using LOCC, as is always possible without superselection rules WSH00 . We will exploit this fact to construct a data hiding protocol datahid ; datahid2 , where the goal is to distribute some information (classical or quantum) among several partners in such a way that they can only ”read” it if they are provided with the means to perform joint measurements. It has been proven that a perfect scheme is impossible datahid . In the presence of superselection rules however, we will show that perfect data hiding is possible, and that one can do it with pure states.

Furthermore, we will show that our view of entanglement and quantum nonlocality has to be altered Zan01 ; Barn ; Wiseman . Entangled states are usually defined as those which cannot be prepared by LOCC out of a product state. This definition highlights the fact that in order to entangle two systems they must interact with each other (eventually via some third system). It distinguishes these states from those that are classically correlated (equivalently, separable), i.e., which can be written in the form Wer89

$$\rho =\underset{k}{}p_k|a_ka_k||b_kb_k|,$$
(1)
where $`1p_k0`$ and $`|a_k`$ and $`|b_k`$ are normalized states. When we are dealing with superselection rules however, it happens that separable states cannot necessarily be prepared locally anymore, giving rise to the existence of states that are separable but nonlocal. We will show how this gives rise to a new type of nonlocal resource, as these states can be used to act as mediators to implement operations that are impossible by LOCC.

Finally, we will also show that all quantum information protocols can also be implemented in the presence of such superselection, so that these rules in practice do not impose any restriction to what one can do in practice, but rather offer novel ways to implement protocols that otherwise may not be possible. Note however that, unfortunately, the impossibility proof of quantum bit commitment bc  remains valid May02 .

We start out considering a set of particles and the corresponding Hilbert space $`H`$. We can always decompose

$$H=_{N=0}^{\mathrm{}}H_N$$
(2)
where $`H_N`$ is a subspace with a total number $`N`$ of particles. We assume that the particle number is a superselection observable, in the sense that the corresponding operator commutes with all observables GP . This immediately imposes that superposition of pure states with different particle number cannot be prepared. This is the case, for example, in all the experiments with atoms or electrons. Any density operator must therefore admit a decomposition of the form

$$\rho =\underset{N=0}{\overset{\mathrm{}}{}}p_N\rho _N,$$
(3)
where $`\rho _N`$ is supported in $`H_N`$.

The situation becomes more intriguing when we consider two systems, A and B, spatially separated. Then, $`H_N=_{n=1}^N(H_n^AH_{Nn}^B)`$, where $`H_n^A`$ ($`H_n^B`$) denotes a Hilbert space corresponding to system A (B), with $`n`$ particles. The superselection rule combined with locality imposes that $`A`$ and $`B`$ cannot prepare superposition states of different local number of particles by LOCC. As we now show, this has very deep consequences in the concept of entanglement. In fact, there might be states which are separable but still they cannot be prepared locally, and therefore they are nonlocal. Let us consider two simple examples of such states. We take the simplest case in which $`H^{A,B}`$ are one–dimensional, i.e. they are spanned by the vectors $`|n_{A,B}`$ with $`n`$ particles.

Example 1:

$$\rho _1=\frac{1}{4}(|0_A0||0_B0|+|1_A1||1_B1|)+\frac{1}{2}|\mathrm{\Psi }_+_{AB}\mathrm{\Psi }_+|,$$
(4)
where $`|\mathrm{\Psi }_+_{AB}=(|0_A|1_B+|1_A|0_B)/\sqrt{2}`$. This state is separable and has a very simple separable decomposition with $`p_k=1/4`$ ($`k=1,2,3,4`$) and

$`|a_{1,2}`$ $`=`$ $`|b_{1,2}:={\displaystyle \frac{1}{\sqrt{2}}}(|0\pm |1),`$ (5a)
$`|a_{3,4}`$ $`=`$ $`|b_{3,4}:={\displaystyle \frac{1}{\sqrt{2}}}(|0\pm i|1).`$ (5b)
Note that all these states are not compatible with the local version of the superselection rule, since they involve a superposition of different number of particles, and this applies to all separable decompositions.

Example 2:

$$\rho _2=_0^{2\pi }\frac{d\varphi }{2\pi }|\alpha e^{i\varphi }_A\alpha e^{i\varphi }||\alpha e^{i\varphi }_B\alpha e^{i\varphi }|,$$
(6)
where $`\alpha >0`$ and

$$|\alpha e^{i\varphi }:=e^{\alpha ^2/2}\underset{n=0}{\overset{\mathrm{}}{}}\frac{\alpha ^n}{\sqrt{n!}}e^{i\varphi n}|n,$$
(7)
denotes a coherent state. This state can be written in the form (3) since it commutes with the total number operator, and therefore is compatible with the superselection rule. On the other hand, this state is obviously separable, though the states $`|\alpha e^{i\varphi }`$ (7) are incompatible with the superselection rule.

Let us now show that the states (4,6) cannot be prepared locally if superselection rules apply. We will first derive a general result which is not only valid for the simple case in which $`H_n^{A,B}`$ are one–dimensional. Thus, these subspaces could now have an arbitrary number of dimensions, which include, for example, the use of ancilliary systems, and other modes or degrees of freedom of the particles. We just need to define $`P_n^A`$, the projector onto $`H_n^A`$ and analogously for $`P_n^B`$.

Proposition 1: If $`\rho `$ can be prepared locally, then

$$\rho =𝒩(\rho ):=\underset{n_A,n_B=0}{\overset{\mathrm{}}{}}(P_{n_A}^AP_{n_B}^B)\rho (P_{n_A}^AP_{n_B}^B).$$
(8)
Proof: $`\rho `$ can be written as a convex combination of $`|a_{n_A}_A|b_{n_B}`$ with $`|a_{n_A}H_{n_A}^A`$ and $`|b_{n_B}H_{n_B}^B`$ which themselves fulfill (8). One can easily show that ancilliary systems do not affect this property.

Coming back to Examples 1 and 2, we have

$`𝒩(\rho _1)`$ $`=`$ $`{\displaystyle \frac{1}{4}}{\displaystyle \underset{n,m=0}{\overset{1}{}}}|n_An||m_Am|\rho _1,`$ (9a)
$`𝒩(\rho _2)`$ $`=`$ $`{\displaystyle _0^{2\pi }}{\displaystyle \frac{d\varphi _1}{2\pi }}|\alpha e^{i\varphi _1}_A\alpha e^{i\varphi _1}|`$ (9b)
$``$ $`{\displaystyle _0^{2\pi }}{\displaystyle \frac{d\varphi _2}{2\pi }}|\alpha e^{i\varphi _2}_B\alpha e^{i\varphi _2}|\rho _2.`$
Thus, as announced above, both $`\rho _{1,2}`$ are separable states which cannot be locally prepared and are therefore expected to exhibit some kind of nonlocal properties.

The dual problem to the local preparation of quantum states is the problem of locally distinguishing quantum states (eventually with the help of classical communication). In the presence of superselection rules, the following applies:

Proposition 2: The states $`\rho `$ and $`𝒩(\rho )`$ cannot be distinguished using local operations and classical communication (LOCC).

Proof: First, note that we do not need to consider POVMs since we can always include the state of the ancillas in $`\rho `$. The operator corresponding to any observable $`X_A`$ ($`X_B`$) that Alice (Bob) measures has to commute with her (his) particle number operator, and thus we can write $`\mathrm{tr}[(X_AX_B)\rho ]=\mathrm{tr}[𝒩(X_AX_B)\rho ]=\mathrm{tr}[(X_AX_B)𝒩(\rho )]`$.

Now, let us turn to introduce a quantum information task which makes use of these ideas. Since the local distinguishability is drastically affected by the presence of superselection rules, it is natural to investigate quantum data hiding protocols datahid ; datahid2 . We will show how a third party can give a secret bit to Alice and Bob which cannot be disclosed if they are only allowed to use local operations and classical communication (LOCC). If the bit is $`0`$ or $`1`$, the state

$$|\pm :=\frac{1}{\sqrt{2}}(|0_1|1_2\pm |1_1|0_2),$$
(10)
is prepared, respectively. Then system 1 is given to Alice whereas system 2 to Bob. Note that the states $`|\pm `$ contain a superposition of two one–particle states and can therefore be prepared by the third party. In order to show that Alice and Bob can get no information about the bit, it is sufficient to note that $`𝒩(|++|)=𝒩(||)`$: proposition 2 ensures that Alice and Bob cannot learn the value of the bit, even if they use classical communication. This value can be obviously read if they are allowed to perform joint operations. Notice that the scheme is perfect and uses pure states, in contrast to what happens in the scenario without superselection rules where perfect data hiding is not possible datahid . Note also that following datahid , the present scheme can be used to hide quantum bits.

Next, we analyze the resources needed by Alice and Bob to learn the value of the bit if they can perform LOCC and they share entanglement. First, let us assume that they are given the entangled state

$$|\mathrm{\Psi }_{AB}=\frac{1}{\sqrt{N+1}}\underset{n=0}{\overset{N}{}}|n_A|Nn_B.$$
(11)
Thus, the total state will be

$`|\mathrm{\Psi }_\pm `$ $``$ $`|0,0_A|1,N_B\pm |1,N_A|0,0_B`$
$`+{\displaystyle \underset{n=1}{\overset{N}{}}}(|0,n_A|1,Nn_B\pm |1,n1_A|0,Nn+1_B).`$
We consider the following local measurement. Alice and Bob measure both in the orthonormal basis composed of

$$|\pm ,n:=\frac{1}{\sqrt{2}}(|0,n\pm |1,n1)$$
(12)
($`n>0`$) and $`|+,0:=|0,0`$, $`|,0:=|1,N`$. Then, each of them assigns the value 0 (1) to the measurement if the outcome of the measurement corresponded to one of the states $`|+,n`$ ($`|,n`$) for some $`n`$. In case both assignments are the same (different), then they infer that the hidden bit was $`0`$ ($`1`$). One can easily see that they will guess the value of the bit with a probability $`N/(N+1)`$. We see that the probability is smaller than one but approaches this value for $`N\mathrm{}`$.

It seems to be a distinctive feature of distributed quantum systems subject to superselection rules that no perfect discrimination is possible in the presence of a bounded amount of nonlocal resources: unlike the usual case where teleportation can be used to create a quantum channel through a classical channel assisted by entanglement, this is in general not possible anymore in the presence of superselection rules. A classical channel assisted by a finite amount of entanglement is not equivalent anymore to a quantum channel IP . In particular, this implies that our quantum data hiding scheme can be made arbitrary secure in the presence of a bounded amount of nonlocal resources shared between Alice and Bob note2 .

Now we show that the separable states that cannot be prepared locally can also help to reveal the value of the hidden bit. This indeed proves that they are ”more useful” to perform certain tasks than the ones that can be prepared locally, and therefore give rise to a new kind of nonlocal resource IP . We consider that, apart from the shared state, they are given the separable state $`\rho _2`$ \[Eq.(6)\]. Then, they perform the same local measurement as before and choose the value of the bit in the same way. Let us denote by $`P_{x,y,n,m}^z`$ the probability that they obtain the outcomes corresponding to $`|x,n`$ and $`|y,m`$, respectively, if the bit was $`z`$ ($`x,y=\pm `$ and $`z=0,1`$). We have

$`f_{n,m}(\alpha )`$ $`=`$ $`P_{+,+,n,m}^0=P_{,,n,m}^0=P_{+,,n,m}^1=P_{,+,n,m}^1`$ (13)
$`=`$ $`{\displaystyle \frac{e^{2\alpha ^2}}{4}}{\displaystyle \frac{|\alpha |^{2(n+m1)}}{n!m!}}|\sqrt{n}+\sqrt{m}|^2.`$
One can readily prove that $`_{n,m=1}^{\mathrm{}}f_{n,m}(\alpha )`$ tends to 1 in the limit $`\alpha \mathrm{}`$. Thus, the probability of detecting the value of the bit can be made arbitrarily close to one without using a non–separable state, although we have proven that this was not possible with LOCC operations.

Let us next formulate a few extensions to the present quantum data hiding scheme. First of all, it can easily be shown that Alice and Bob cannot extract any information even if they are given multiple copies of the same hiding state: this follows from the fact that $`𝒩(\rho _1^M)=𝒩(\rho _2^M)`$ for any number of copies $`M`$. This fact could be very useful when quantum data hiding would be implemented in a realistic environment with decoherence. Secondly, our scheme can readily be generalized to the multipartite setting datahid2 . Consider for example the following $`N`$-party state:

$$|\pm :|0_1|1_2\mathrm{}|N1_N\pm |1_1|2_2\mathrm{}|N_{N1}|0_N$$

One immediately sees that this hiding scheme is perfectly secure, even when $`N1`$ parties would decide to join forces. Note that more sophisticated versions can readily be constructed.

So far we have shown that the particle number superselection rules restricts the action that can be performed locally, which may be used to perform certain tasks that otherwise would be impossible. This seems to suggest that such rules may restrict some quantum information protocols. Now we show that this is not the case, i.e. that it is always possible to perform such protocols. The idea is quite simple and consists of noticing that we can always consider states that have a fixed number of local particles. Thus, if we want to have a protocol using a $`d+1`$–level systems in one particular location, we can just take states of the form $`|n:=|n,dn`$ ($`n=0,1,\mathrm{},d`$) in that location. Obviously, superselection rules do not give any restriction in the manipulation of these states. More specifically, a genuine qubit can be encoded in the subspace spanned by the states $`|01,|10`$, and in this case one can readily verify that all known normal quantum information tasks such as teleportation and quantum error correction can be implemented.

Finally, we discuss a possible set–up where our ideas can be physically implemented and proof of principle experiments may be carried out. We propose to use atoms as particles, since the number of atoms can be considered as a superselection rule. Let us consider, for simplicity, a set of bosonic atoms, each of them with two internal (ground) levels $`|a`$ and $`|b`$. We will assume that they are at very low temperature, as it is usually achieved in Bose–Einstein condensation experiments BEC . We will also ignore the effect of interactions, something which can be achieved by appropriately tuning the scattering length. We will denote by $`a_0`$ ($`b_0`$) the annihilation operators of atoms in internal state $`|a`$ ($`|b`$) and motional state $`|\psi _0`$, the one corresponding to the ground state of the Bose–Einstein condensate. Denoting by $`N`$ the initial number of atoms, the initial state can be written in second quantization as

$$|\mathrm{\Psi }(0)=\frac{(a_0^{})^N}{\sqrt{N!}}|\mathrm{vac}.$$
(14)
If a pair of laser in Raman configuration is applied for the appropriate time, the state will be the same as before but with $`a_0(a_0\pm b_0)/\sqrt{2}`$, where the sign $`\pm `$ can be easily adjusted with the laser phase–difference and it is chosen according to the value of the bit that needs to be hidden. We will assume that the trap holding the atoms in the internal state $`a`$ can be manipulated independently of the one for atoms in $`b`$ Jetal . Thus, they can now adiabatically be spatially separated, so that the atoms remaining in state $`|a`$ are in a different location than those in $`|b`$. The first are given to Alice, where the second are given to Bob. One can readily see that the sign $`\pm `$ cannot be read by using local measurement and classical communication, something which is due to the conservation of the atom number. In order to read the result, one can bring the atoms back to the initial situation and measure the internal atomic state by applying a laser pulse that transforms $`a_0(a_0+b_0)/\sqrt{2}`$ and $`b_0(a_0b_0)/\sqrt{2}`$. If the atoms are found in state $`|a`$ the bit was zero and otherwise it was one. Let us emphasize that a Bose–Einstein condensate is not required to perform this experiments, and that even the typical atom interferometry experiments already show the effect that we are discussing Myln . On the other hand, the number of atoms $`N`$ does not need to be known. Moreover, the readout of the state of the bit can be accomplished by using another Bose–Einstein condensate which is split again into two parts but now with a well defined value of the sign. An interference experiment in each of the sides will then reveal the value of the bit CGZ . Finally, let us remark that, in practice, one can also perform the experiments with a simple set–up which uses laser light instead of atoms.

###### Acknowledgements.

We thank Sandu Popescu for triggering our interest in superselection rules and quantum information. This work was supported in part by the E.C. (RESQ IST-2001-37559) and the Kompetenznetzwerk ”Quanteninformationsverarbeitung” der Bayerischen Staatsregierung.


text:
# Multiple time scales in volatility and leverage correlations: An stochastic volatility model

## I Introduction

The interest for financial markets models has considerably increased during the last twenty years. The traditional Black-Scholes Gaussian model is now well known to be inadequate; devising faithful and convenient models for the price processes is essential for risk control, derivative pricing and other trading operations. Data analysis has now become a mandatory step in model building, using the wealth of available tick-by-tick data or high-frequency data dacorogna . There is now enough data to establish, with statistical accuracy, some fundamental properties of market dynamics. Empirical observations provide a list of universal features that seem to hold in most markets, quite independently of the observation period and of the type of asset. These are the so-called stylized facts (see e.g. cont ; dacorogna2 ; MS ), which should be reproduced, at least to some extent, by any reasonable market model.

One of the best established stylized fact is the existence of volatility fluctuations that are long-ranged correlated in time. Empirical studies show that the volatility correlation function decays very slowly in time, and is well fitted by a power-law of the time lag with a small exponent volat1 ; volat2 ; volat3 ; muzy . An exponential fit with a single time scale – suggested by several simple stochastic volatility (SV) models Stein ; Heston ; fouquebook ; schobel ; perello2 ; Yakov  – fails to describe the data: either the time scale is chosen to be small (a few days) and the long time tail is completely missed, or the time scale is chosen to be large (several hundreds of days), and the rapid initial decay is not properly accounted for. At least two time scales, and perhaps even three LeBaron  are needed to reproduce the volatility dynamics. Recent multifractal models Mandel ; muzy ; Fisher  actually postulate the existence of an infinity of time scales to build a self-similar volatility model with a power-law autocorrelation function.

Another, less well documented, effect is the negative return-volatility correlation: price drops are followed by an increased level of volatility. This effect was first noted by Black black76  and is usually called, somewhat inappropriatly, the ‘leverage’ effect, or asymmetric volatility correlation Beckart . The presence of these correlations leads to skew in the distribution of returns and, correspondingly, to skew in the option smiles. The effect is much stronger for stock indices than for individual stocks, but appears to decay on rather short time scales (10-20 days bouchaud ; perello2 ), much shorter than the long time scale noted above for the volatility correlation.

Among the several SV models presented fouquebook , both the Heston Heston ; fouquebook ; Yakov  and the Ornstein-Uhlenbeck Stein ; schobel ; perello2  SV models are susceptible to contain an asymmetry parameter that generates some leverage correlations pm . However, as mentioned above, these models contain a single time scale which governs both the volatility correlations and the return-volatility correlations, and cannot account for the different temporal behaviour of the two. Multifractal models, on the other hand, have only been very recently extended to consider the leverage effect Pochart ; muzy-new . These models are however quite complex and analytical results for the unconditional and conditional return distribution over different time scales are only partially available muzy2 ; Pochart .

Our aim in this paper is to extend the exactly soluble Ornstein-Uhlenbeck SV model introduced in Stein ; schobel ; perello2 , such as to reproduce the multi-time scale dynamics reported above. In the present paper we allow for two different time scales, but the model can be generalised to account for as many time scales as needed, still retaining its exactly soluble nature. The basic idea is to make the mean reverting level of the volatility itself random and time dependent. The paper is divided into six sections. In section II we present our three-dimensional diffusion model. Sections III and IV respectively study the leverage and volatility correlations. In Section V we apply the model to actual data, thus providing a way of estimating the parameters of the model. Conclusions are drawn in section VI and some more technical details are relegated to appendices.

## II A three-dimensional diffusion model

The dynamics of stock price $`S(t)`$ is usually modelled as a multiplicative diffusion process. It is commonly assumed that stock price $`S(t)`$ obeys the diffusion process:

$$\frac{dS(t)}{S(t)}=\mu dt+\sigma dW_1(t),$$
(1)
where $`\mu `$ is the drift, $`\sigma `$ is the so-called volatility and $`W_1(t)`$ is a Wiener process, i.e., $`dW_1(t)=\xi _1(t)dt`$, where $`\xi _1(t)`$ is Gaussian white noise with zero-mean and unit volatility:

$$\xi _1(t)=0\text{and}\xi _1(t)\xi _1(t^{})=\delta (tt^{}).$$

For the sake of simplicity we will work with the zero-mean return process defined by

$$dX(t)\frac{dS(t)}{S(t)}\mu dt.$$
(2)
Market dynamics is then described by a simpler stochastic differential equation (SDE)

$$dX(t)=\sigma dW_1(t).$$
(3)
As is well-known, this model does not satisfactorily explain many properties of the market. A possible improvement is to assume that, besides the return following the diffusion process (1), the volatility itself is a random variable, i.e., $`\sigma =\sigma (t)`$ is a stochastic process. This is done in the stochastic volatility models which appeared in the literature during late eighties fouquebook , following similar discrete time ‘ARCH’ models. There are several ways to choose the random process describing the volatility Heston ; fouquebook . The simplest one consists in assuming that the volatility is also a diffusion process following the Ornstein-Uhlenbeck (OU) process Stein :

$$d\sigma =\alpha (\sigma m)dt+kdW_2(t),$$
(4)
where $`\alpha >0`$, $`k>0`$, and $`m`$ are nonrandom quantities, and $`dW_2(t)`$ is another Wiener process. The quantity $`1/\alpha `$ is the characteristic time scale of the process and measures the strength of the reversion of $`\sigma (t)`$ to the constant $`m`$ which is the ‘normal’ level of volatility (see below). The quantity $`k`$ is the amplitude of the volatility fluctuations and it is sometimes called ‘vol of vol’. As is well known, the stationary distribution of the OU process is Gaussian and this implies that the probability density does not vanish for $`\sigma 0`$. Since only $`|\sigma |`$ is meaningful, one has to ‘fold’ the negative part of the Gaussian onto the positive side with the result that the probability of $`|\sigma |`$ has a small hump for $`|\sigma |`$ small. This and the Gaussian shape of the distribution of the volatility are not very realistic because the empirical distribution of the volatility is rather found to be close to a log-normal, or to an inverse Gamma distribution micchiche ; bouchaudbook . This is certainly a limitation of the present model. An interesting extension would be to consider the case where $`\mathrm{ln}\sigma `$, instead of $`\sigma `$, follows an OU process. Another limitation of the present model is the assumption that $`dW_1(t)`$ is Gaussian. Although volatility fluctuations indeed generate fat tails, the empirical frequency of very large returns (like crashes) cannot be reproduced within the class of Gaussian stochastic volatility models, and some extra ‘jumps’ must be allowed (see the empirical results and comments in Section V).

Two of us have recently studied the model represented by Eqs. (1)–(4) and showed perello2  that it reproduces the leverage correlation only when the variations of volatility are anticorrelated with the variations of return. In other words, when both Wiener processes $`W_1(t)`$ and $`W_2(t)`$ appearing in Eqs. (1) and (4) are anticorrelated:

$$\xi _1(t)\xi _2(t^{})=\rho \delta (tt^{}),$$
(5)
where $`\rho <0`$. As mentioned above the model given by Eqs. (1) and (4) together with Eq. (5) reproduces very well the observed leverage correlation but is unfortunately unable to reproduce simultaneously the long range volatility autocorrelation because leverage and volatility autocorrelation have both approximately the same characteristic time given by $`1/\alpha `$.

In the volatility process given by Eq. (4), $`m`$ is a nonrandom constant and indicates the level to which the average volatility eventually converges as time increases engle . In order to visualize this, suppose that the process begun in the infinite past ($`t_0\mathrm{}`$) which implies that at time $`t`$ the volatility has reached a stationary state, independent of initial conditions. In this situation one can easily see from the integration of Eq. (4) that

$$\sigma (t)=m+k_{\mathrm{}}^te^{\alpha (tt^{})}𝑑W_2(t^{}).$$
(6)
From this we clearly see why $`m`$ can be called the normal level of volatility since (i) it is the stationary mean value of the volatility, $`\sigma (t)=m`$, and (ii) $`m`$ is the value to which $`\sigma (t)`$ would return without any random innovation ($`k=0`$).

However, there is no reason to believe that this ‘normal’ level of volatility is not itself slowly time evolving, with long periods where the average volatility is high (like stocks in the 30’s), and other periods where it is smaller (like in the 60’s). We will now relax this assumption and explore its consequences. We thus assume that $`m=m(t)`$ is a random process also obeying an OU stochastic differential equation:

$$dm=\alpha _0(mm_0)dt+k_0dW_3(t),$$
(7)
where $`\alpha _0>0`$ and $`k_0>0`$, and $`m_0`$ is now the ‘true’ long time average of the volatilty (but see the discussion in the conclusion). We therefore propose that the process describing the whole market dynamics is the following three-dimensional random process:

$`dX(t)=\sigma (t)dW_1(t),`$ (8)
$`d\sigma (t)=\alpha [\sigma (t)m(t)]dt+kdW_2(t),`$ (9)
$`dm(t)=\alpha _0[m(t)m_0]dt+k_0dW_3(t),`$ (10)
where $`dW_i(t)=\xi _i(t)dt`$ $`(i=1,2,3)`$ are Wiener processes, i.e., $`\xi _i(t)`$ are zero-mean Gaussian white noises with cross-correlation given by

$$\xi _i(t)\xi _j(t^{})=\rho _{ij}\delta (tt^{}),$$
(11)
where $`\rho _{ij}=\rho _{ji}`$ and $`\rho _{ii}=1`$. We also suppose that $`W_3(t)`$ is independent of $`W_1(t)`$ and $`W_2(t)`$. Hence, the correlation matrix is

$$(\rho _{ij})=\left(\begin{array}{ccc}1& \rho & 0\\ \rho & 1& 0\\ 0& 0& 1\end{array}\right)$$
(12)
where $`1\rho 1`$. As is common in finance, Eqs. (8)-(10) are interpreted in the Itô sense and for the rest of the paper we will follow the Itô convention perello1 . A key consequence of the Itô convention is that $`\sigma (t)`$ and $`m(t)`$ are independent of any of the same time driving noises $`dW_i(t)`$ $`(i=1,2,3)`$.

Note that the choice of the correlation matrix given by Eq. (12) assumes that the variations of return and instantaneous volatility are directly correlated while the variation of the volatility normal level is unaffected by recent price changes. Although reasonable from a financial point of view, there exists a different limit in which the normal level of volatility is directly correlated with the return. This case is treated in Appendix C where we focus on an alternative correlation matrix for which $`\rho _{12}=0`$ and $`\rho _{13}=\rho `$ instead of $`\rho _{12}=\rho `$ and $`\rho _{13}=0`$. We will see there that in this limit both the leverage and volatility correlations are governed, on long time scales, by the ‘slow mode’ of the model.

In what follows we will assume that at time $`t`$ the entire process has reached the stationary state. From Eq. (7) we see that the expression for $`m(t)`$ in the stationary state is

$$m(t)=m_0+k_0_{\mathrm{}}^te^{\alpha _0(tt^{})}𝑑W_3(t^{}).$$
(13)
Now the stationary expression for $`m(t)`$ is given by the solution of Eq. (9) rather than by Eq. (6). We thus have

$$\sigma (t)=_{\mathrm{}}^t[k\xi _2(t^{})+\alpha m(t^{})]e^{\alpha (tt^{})}𝑑t,$$

which, after using Eq. (13), reads

$`\sigma (t)=m_0`$ $`+`$ $`k{\displaystyle _{\mathrm{}}^t}e^{\alpha (tt^{})}𝑑W_2(t^{})+{\displaystyle \frac{k_0}{1\lambda }}{\displaystyle _{\mathrm{}}^t}\left[e^{\alpha _0(tt^{})}e^{\alpha (tt^{})}\right]𝑑W_3(t^{}),`$ (14)
where

$$\lambda =\frac{\alpha _0}{\alpha }.$$
(15)
We will see later on that empirical evidence implies that $`0\lambda <1`$, as suggested by the initial motivation of the model. One of the interest of this linear model is that one can also compute explicitely, using its Markovian nature the time evolution of the volatility conditioned to a given present value of the instantaneous volatility $`\sigma (t_0)`$ and of the ‘normal’ level of the volatility $`m(t_0)`$. This in turn opens the way to obtain the conditional distribution of returns over an arbitrary horizon $`T`$, a quantity needed for pricing options (see Stein ; schobel ; perello2 ).

Observe that since $`m(t)`$ is a Gaussian process its mean and variance read

$$m(t)=m_0,\text{Var}[m(t)]=m_0^2\nu _0^2,$$
(16)
and the autocorrelation is

$$m(t)m(t+\tau )=m_0^2\left(1+\nu _0^2e^{\alpha _0\tau }\right)(\tau 0),$$
(17)
where $`\tau 0`$ and $`\nu _0`$ is defined by

$$\nu _0^2=\frac{k_0^2}{2m_0^2\alpha _0}.$$
(18)
Likewise $`\sigma (t)`$ is also Gaussian and has the following averages

$$\sigma (t)=m_0,\text{Var}[\sigma (t)]=m_0^2\left(\nu ^2+\nu _0^2\frac{1}{1+\lambda }\right),$$
(19)
and autocorrelation

$`\sigma (t)\sigma (t+\tau )=m_0^2\left[1+\left(\nu ^2{\displaystyle \frac{\lambda \nu _0^2}{1\lambda ^2}}\right)e^{\alpha \tau }+{\displaystyle \frac{\nu _0^2}{1\lambda ^2}}e^{\alpha _0\tau }\right]`$ (20)
where $`\tau 0`$, and

$$\nu ^2=\frac{k^2}{2m_0^2\alpha }.$$
(21)
## III The Leverage effect

As recalled in the introduction, it has been known for long that volatility and returns are negatively correlated black76 . This correlation has however not been studied from a quantitative manner until quite recently bouchaud , where the following ‘leverage’ correlation function was studied:

$$(\tau )\frac{1}{Z}dX(t+\tau )^2dX(t)$$
(22)
where $`dX(t)`$ is the zero-mean return and

$$Z=dX(t)^2^2$$
(23)
is a convenient normalization coefficient. A large amount of daily returns for both market indices and share prices were studied in bouchaud , with the finding that,

$$(\tau )\{\begin{array}{cc}Ae^{\mathrm{\Gamma }\tau },\hfill & \text{if }\tau >0\text{;}\hfill \\ 0,\hfill & \text{if }\tau <0\text{;}\hfill \end{array}$$
(24)
$`(A,\mathrm{\Gamma }>0)`$. Hence, there is an exponentially decaying negative correlation between future volatility and past returns changes. No correlation is found between past volatility and future price changes (except perhaps for very short time lags $`|\tau |`$). In this way, a clear causality of the leverage effect is established, whereas there are conflicting claims on this issue in the literature Beckart . For individual stocks, the coefficient $`A`$ is found to be close to $`2`$, a value expected on the basis of simple ‘retarded’ effect, where the price changes are locally additive, rather than multiplicative random variables bouchaud . For indices, however, $`A`$ is much stronger ($`A20`$), and the retarded interpretation fails. The coefficient $`\mathrm{\Gamma }`$, on the other hand, defines the inverse relaxation time of the leverage correlation, and is found to be on the order of ten days for stock indices.

Let us study the leverage correlation within the framework of the three-dimensional diffusion model presented in Section II. First, from Eq. (8), we calculate the correlation

$$dX(t)dX(t+\tau )^2=\sigma (t)dW_1(t)\sigma (t+\tau )^2dW_1(t+\tau )^2.$$
(25)
Following the Itô convention, if $`\tau 0`$ then $`dW_1(t+\tau )`$ is uncorrelated with the rest of stochastic variables. Thus, taking into account that

$$dW_1(t+\tau )^2=dt,$$

we have

$$dX(t)dX(t+\tau )^2=\sigma (t)dW_1(t)\sigma (t+\tau )^2dt(\tau >0).$$

Otherwise, if $`\tau 0`$, then $`dW_1(t)`$ is uncorrelated with the remaining variables. Hence, taking into account that $`dW_1(t)=0`$, we get

$$dX(t)dX(t+\tau )^2=0(\tau 0).$$

Therefore,

$$dX(t)dX(t+\tau )^2=\sigma (t)\sigma (t+\tau )^2dW_1(t)\text{H}(\tau )dt,$$
(26)
where

$$\text{H}(\tau )=\{\begin{array}{cc}1,\hfill & \text{if }\tau >0\text{;}\hfill \\ 0,\hfill & \text{if }\tau 0\text{;}\hfill \end{array}$$
(27)
is the Heaviside step function. Now the Novikov theorem allows us to write (see Appendix A)

$$dX(t)dX(t+\tau )^2=2\rho ke^{\alpha \tau }\text{H}(\tau )\sigma (t)\sigma (t+\tau )dt^2,$$
(28)
where $`\sigma (t)\sigma (t+\tau )`$ is given by Eq. (20).

On the other hand, as a consequence of the Itô convention, processes $`\sigma (t)`$ and $`dW_1(t)`$ are independent. Therefore from Eqs. (8) and (23) we see that

$$Z=dX(t)^2^2=\sigma (t)^2^2dW_1(t)^2^2=\sigma (t)^2^2dt^2.$$

Taking into account Eq. (19), $`Z`$ reads

$$Z=m_0^4\left(1+\nu ^2+\frac{\nu _0^2}{1+\lambda }\right)^2dt^2,$$
(29)
Finally, the substitution of Eqs. (20), (28) and (29) into Eq. (22) yields

$$(\tau )=\text{H}(\tau )A(\tau )e^{\alpha \tau },$$
(30)
where

$$A(\tau )\frac{2\rho \nu \sqrt{2\alpha }}{m_0\left(1+a+b\right)^2}\left[1+ae^{\alpha \tau }+be^{\alpha _0\tau }\right],$$
(31)
with:

$$a=\nu ^2\frac{\lambda \widehat{\nu }_0^2}{1\lambda },b=\frac{\widehat{\nu }_0^2}{1\lambda },$$
(32)
and

$$\widehat{\nu }_0^2\frac{\nu _0^2}{1+\lambda }.$$
(33)
Note that Eq. (30) is not very different from Eq. (24) above: the dominant time decay is fixed by the short time scale of the volatility process $`1/\alpha `$. As intuitively expected, the correlation coefficient $`\rho `$ between $`dW_1`$ (returns) and $`dW_2`$ (volatility changes) needs to be negative if we want to describe the observed anticorrelation.

## IV Volatility correlation

The correlation for the volatility $`\sigma (t)`$ has been already given by Eq. (20). Nevertheless, in order to study the different time regimes appearing in the correlation, it is convenient to deal with a slightly different form of correlation. We will thus work with the function

$$\text{Corr}[\sigma (t),\sigma (t+\tau )]=\frac{\sigma (t)\sigma (t+\tau )}{\sqrt{\text{Var}[\sigma (t)]}\sqrt{\text{Var}[\sigma (t+\tau )]}}$$

where $`\sigma (t)\sigma (t+\tau )`$ is the second cumulant of the volatility process defined by

$$\sigma (t)\sigma (t+\tau )=\sigma (t)\sigma (t+\tau )\sigma (t)\sigma (t+\tau ).$$

From Eqs (19) and (20) we have

$$\text{Corr}[\sigma (t),\sigma (t+\tau )]=M[ae^{\alpha \tau }+be^{\alpha _0\tau }],$$
(34)
where

$$M=\frac{1}{\nu ^2+\widehat{\nu }_0^2},$$
(35)
and $`\widehat{\nu }_0^2`$ is given by Eq. (33).

If we assume that $`\alpha _0\alpha `$ the volatility correlation (34) has two different regimes according to $`\tau `$ being small or large.

* Suppose that $`\tau `$ is small and such that the following two conditions meet simultaneously

$$\alpha _0\tau 1\text{and}\alpha \tau 1.$$

In this case, the characteristic time scale of volatility process given by $`1/\alpha `$ (see Eq. (9)) will dominate and the correlation reads

$$\text{Corr}[\sigma (t),\sigma (t+\tau )]M(b+ae^{\alpha \tau }),(\alpha _0\tau 1).$$
(36)
* Suppose now that $`\tau `$ is large and such that

$$\alpha \tau 1\text{and}\alpha _0\tau 1.$$

In this case the characteristic time of the normal level of volatility $`m(t)`$ (see Eq. (10)) is the dominant one and we see from Eq. (34) that

$$\text{Corr}[\sigma (t),\sigma (t+\tau )]Mbe^{\alpha _0\tau },(\alpha \tau 1).$$
(37)

Note that both approximations are consistent since we have assumed that $`\alpha _0\alpha `$. This implies that $`\lambda 1`$ (cf. Eq (15)) is very small which, in turn, simplifies the form of the parameters $`M`$, $`a`$, and $`b`$. Indeed, now we can write

$$M=(\nu ^2+\nu _0^2)^1+\text{O}(\lambda ),$$
(38)
and

$$a=\nu ^2+\text{O}(\lambda ),b=\nu _0^2+\text{O}(\lambda ).$$
(39)
Equations (36) and (37) show respectively the correlation behavior for small and large time $`\tau `$. The long range correlation for the volatility is governed by $`\alpha _0`$, that is, as expected, by the relaxation process of the volatility to its long time average $`m_0`$. This behavior is different from the leverage correlation which has a faster time decay $`\alpha ^1`$ that sets the ‘fast’ reversion of the volatility. Notice that this is consistent with empirical observations cont ; engle ; LeBaron  (see also Fig. 1 and discussion in the next section).

At this stage, we should remind that the actual evaluation of the volatility $`\sigma (t)`$ is very difficult, since the volatility itself is not observed. In practice one can measure a noisy measure of the instantaneous volatility from:

$$|\sigma (t)|\sqrt{\left[X(t+\mathrm{\Delta }t)X(t)\right]^2/\mathrm{\Delta }t},$$
(40)
where $`X(t)`$ is the (undrifted) log-price defined above. Therefore, only $`|\sigma (t)|`$ can be extracted from data, and this is in principle insufficient to estimate (34). Another possible expression for the empirical autocorrelation of the volatility that is more directly observable is:

$$\text{Corr}[dX(t)^2,dX(t+\tau )^2]=\frac{1}{Y}dX(t)^2dX(t+\tau )^2,$$
(41)
where $`Y^2=\text{Var}[dX(t)^2]\text{Var}[dX(t+\tau )^2]`$ and

$$dX(t)^2dX(t+\tau )^2=dX(t)^2dX(t+\tau )^2dX(t)^2dX(t+\tau )^2,$$

is the second cumulant associated with $`dX(t)^2`$. This correlation function is particularly interesting because it is directly related to the kurtosis of the terminal distribution of price changes, a quantity which is in turn related to the curvature of volatility smiles bouchaudbook .

In Appendix B we show that within the present Gaussian model, the empirical correlation coefficient given by Eq. (41) can be written in terms of the volatility autocorrelation as

$$\text{Corr}[dX(t)^2,dX(t+\tau )^2]=\frac{\sigma (t)\sigma (t+\tau )^2\sigma (t)^4}{4\sigma (t)^2^23\sigma (t)^4},$$
(42)
and from Eqs. (19) and (20) we explicitly write

$`\text{Corr}[dX(t)^2,dX(t+\tau )^2]=N[a(2+ae^{\alpha \tau })e^{\alpha \tau }`$ $`+`$ $`b(2+be^{\alpha _0\tau })e^{\alpha _0\tau }+2abe^{(\alpha +\alpha _0)\tau }]`$ (43)
where $`a`$ and $`b`$ are given by Eq. (32) and

$$N=\left[1+8(\nu ^2+\widehat{\nu }_0^2)+4(\nu ^2+\widehat{\nu }_0^2)^2\right]^1.$$
(44)
Observe that correlation (43) consists of a linear combination of decaying exponentials with arguments $`\alpha _0\tau `$, $`\alpha \tau `$, $`2\alpha _0\tau `$, $`2\alpha \tau `$, and $`(\alpha _0+\alpha )\tau `$. We study some asymptotic limits for the correlation (43) as done above with $`\sigma (t)`$. We again consider the case when $`\alpha _0\alpha `$ (i.e., $`\lambda 1`$) and study the short and long $`\tau `$ behavior. For small $`\tau `$, when $`\alpha _0\tau `$ is small but $`\alpha \tau `$ is finite and not too small, we have

$$\text{Corr}[dX(t)^2,dX(t+\tau )^2]N\left[(2+b)b+a\left(2+2b+ae^{\alpha \tau }\right)e^{\alpha \tau }\right],(\alpha _0\tau 1).$$
(45)
In this regime, we only have exponentials with $`\alpha `$ as it happened with the sigma autocorrelation (c.f. Eq. (36)). For large $`\tau `$, the correlation is again dominated by the exponential with characteristic time scale $`\alpha _0`$ and reads

$$\text{Corr}[dX(t)^2,dX(t+\tau )^2]Nb\left(2+be^{\alpha _0\tau }\right)e^{\alpha _0\tau }(\alpha \tau 1).$$
(46)
Observe that pairs of Eqs. (36)–(37) and Eqs. (45)–(46) contain the behavior that is empirically observed in financial markets. Although Eq. (43) has a much more complicated form, it still contains the two desired regimes for large and small $`\tau `$ as we have discussed above.

## V Estimation of parameters

Any acceptable market model must be easily calibrated to reproduce the dynamics of the market. In other words, the model should be supplemented by a systematic methodology for estimating its parameters. In our model we have six parameters to estimate. These parameters are $`\rho `$, $`k`$ and $`k_0`$ (or $`\nu ^2`$ and $`\nu _0^2`$), $`\alpha `$ and $`\alpha _0`$, and $`m_0`$ (see Eqs. (8)–(10)).

Let us discuss the way to estimate these parameters. We will proceed in a very similar way to the case given in Ref. perello2  and perform the empirical estimation of the Dow-Jones index daily returns by approximating $`dX`$ by $`\mathrm{\Delta }XX(t+\mathrm{\Delta }t)X(t)`$, i.e.,

$$dX(t)X(t+\mathrm{\Delta }t)X(t),$$

where $`\mathrm{\Delta }t=1`$ day. From Eqs. (19) and (67) and taking into account that $`\sigma (t)`$ is independent of $`dW_1(t)`$, and that $`dW_1(t)`$ is Gaussian, we have

$`\text{Var}[\mathrm{\Delta }X]`$ $`=`$ $`\sigma (t)^2\mathrm{\Delta }t=m_0^2(1+\nu ^2+\widehat{\nu }_0^2)\mathrm{\Delta }t,`$ (47)
$`\text{Var}[\mathrm{\Delta }X^2]`$ $`=`$ $`\left[3\sigma (t)^4\sigma (t)^2\right]\mathrm{\Delta }t^2=2m_0^4\left[4(1+\nu ^2+\widehat{\nu }_0^2)^23\right]\mathrm{\Delta }t^2,`$
where $`\nu ^2=k^2/(2\alpha m_0^2)`$ and $`\widehat{\nu }_0^2=k_0^2/(2\alpha _0m_0^2(1+\lambda ))`$. From these equations we get

$$\frac{1}{(1+\nu ^2+\widehat{\nu }_0^2)^2}=\frac{4}{3}\frac{1}{6}\frac{\text{Var}[\mathrm{\Delta }X^2]}{\text{Var}[\mathrm{\Delta }X]^2}.$$
(48)
Hence, we can estimate the values of $`(\nu ^2+\widehat{\nu }_0^2)`$ once we know the empirical values of the daily variances of $`\mathrm{\Delta }X`$ and $`\mathrm{\Delta }X^2`$. In a second step, $`m_0`$ is estimated from the knowledge of $`(\nu ^2+\widehat{\nu }_0^2)`$ and the empirical value of $`\text{Var}[\mathrm{\Delta }X]`$. In Table 1, we briefly report these operations and give the corresponding estimation of $`(\nu ^2+\widehat{\nu }_0^2)`$ and $`m_0`$ for the Dow-Jones index time-series from 1900 until 2000.

Since $`(\nu ^2+\widehat{\nu }_0^2)`$ is always positive and $`(1+\nu ^2+\widehat{\nu }_0^2)^21`$, we see from Eq. (48) that

$$2\frac{\text{Var}[\mathrm{\Delta }X^2]}{\text{Var}[\mathrm{\Delta }X]^2}<8,$$

and the kurtosis defined by

$$\kappa =\frac{\text{Var}[\mathrm{\Delta }X^2]}{\text{Var}[\mathrm{\Delta }X]^2}2$$

has the bounds

$$0\kappa <6.$$
(49)
As expected, volatility fluctuations induce some excess kurtosis, but this excess kurtosis cannot take arbitrarily high values. For the Dow-Jones index data and after taking away ‘crash days’ of amplitude greater than $`12\%`$, we get a kurtosis of $`\kappa 1.7`$ which is consistent with the requirement (49). The removal of these outliers only represents 11 data points, a very small fraction of the total amount (more than 27000 sample data points). However, as many authors have reported Lux ; Longin ; Stanley , the total kurtosis is found to be larger, perhaps even infinite (in particular for higher – intraday – frequencies). This is a limitation of the present model for describing higher frequency movements where one should eventually take into account a non Gaussian character for $`dW_1`$ (see the discussion in bouchaudbook  and Refs. mmp ; mmw )

We have four more parameters to estimate, $`\alpha `$, $`\alpha _0`$, $`\nu ^2`$ and $`\rho `$, and we will use both the leverage and the volatility correlations to obtain them. As we see in Figs. 1 and 2, the leverage correlation appears to be much more noisy than the volatility autocorrelation. For this reason we start with volatility autocorrelation for quantifying $`\alpha `$, $`\alpha _0`$, $`\nu ^2`$. We subsequently analyze the leverage correlation for testing the estimated $`\alpha `$ and for finally obtaining the parameter $`\rho `$.

As we have shown in the Section IV there are different ways to interpret the volatility correlation from empirical data. In the previous Section our choice was to take $`\mathrm{\Delta }X(t)^2`$ as the square of the daily volatility. We have computed the empirical volatility correlation and plotted it in Fig. 1 with the corresponding fit with our theoretical correlation in Eq. (43):

$`\text{Corr}[dX(t)^2,dX(t+\tau )^2]=N[a(2+ae^{\alpha \tau })e^{\alpha \tau }+b(2`$ $`+`$ $`be^{\alpha _0\tau })e^{\alpha _0\tau }+2abe^{(\alpha +\alpha _0)\tau }],`$
where $`a=\nu ^2\lambda \widehat{\nu }_0^2/(1\lambda )`$, $`b=\widehat{\nu }_0^2/(1\lambda )`$, $`N=\left[1+8(\nu ^2+\widehat{\nu }_0^2)+4(\nu ^2+\widehat{\nu }_0^2)^2\right]^1`$. The fit plotted in Fig. 1 is done with the constraint that $`a+b=(\nu ^2+\widehat{\nu }_0^2)=0.18`$.

The proposed fit is obtained by taking $`1/\alpha _03`$ years and $`1/\alpha 10`$ days. Recall that $`\lambda =\alpha _0/\alpha `$ is been assumed in previous Sections to be very small and this is now confirmed by empirical observations since $`\lambda =1.3\times 10^2`$. In such a case, we can consider that $`a\nu ^2`$ and $`b\nu _0^2`$. The results obtained are given in Table 2 jointly with $`k`$ and $`k_0`$ that are given by Eqs. (18) and (21).

The leverage effect provides a way to estimate the correlation coefficient $`\rho `$. It also serves us as a test of consistency in the estimation of the characteristic time $`1/\alpha `$. In a previous work perello2 , it is been suggested that $`1/\alpha 20`$ days. However, the fit of the leverage function (30)–(31) to the Dow-Jones daily data (Fig. 2) is not very binding. The quality of this non linear fit remains basically unchanged for modifications in $`1/\alpha `$ inside the range $`720`$ days. For this reason we will keep our estimated $`\alpha `$ from volatility autocorrelation and accept that the results from the leverage correlation are consistent with the ones derived from the volatility correlation.

Let us now focus on the estimation of $`\rho `$. Recall that our theoretical leverage is given by Eqs. (30)-(31) with $`a`$ and $`b`$ given by Eq. (32). When $`\tau 0^+`$, we have

$$(0^+)=\frac{2\rho \nu \sqrt{2\alpha }}{(1+\nu ^2+\widehat{\nu }_0^2)m},$$
(50)
which allows us to estimate $`\rho `$ once we know $`\alpha =0.1\text{ days}^1`$ and $`(\nu ^2+\widehat{\nu }_0^2)=0.18`$. All these operations are summarized in Table 2. The estimated magnitudes $`(0^+)`$ and $`\alpha `$ obtained from the Dow-Jones index are of the same order as those given in bouchaud  from an average over several stock indices. The value of $`\alpha `$ is also consistent with that found by Dragulescu and Yakovenko within the Heston model Yakov  (for which the volatility correlation function is a single exponential).

Finally, in Figs. 3 and 4 we simulate the resulting process with the parameters estimated above. Once we know the six estimated parameters, we can simulate the random dynamics for $`\mathrm{\Delta }X(t)`$ and compare it with the empirical Dow-Jones time series. We also simulate the ordinary geometric Brownian motion where the volatility is constant together with the two-dimensional SV model studied in perello2  in which the normal level of volatility is constant. In Figs. 3 and 4 we see that the ordinary geometric Brownian model cannot describe both the largest and the smallest fluctuations of daily returns. Furthermore, the two-dimensional SV model is not able to describe the clustering that appears when we take a longer number of days (see Fig. 3). Hence, we can conclude that SV models generate trajectories similar to that of the Dow-Jones but the three-dimensional model presented herein improves this description when we observe a wider time window. On the other hand, one should keep in mind that some aspects of the empirical data, such as the nearly log-normal distribution of volatility, or the extreme tails of the distribution of returns, are not reproduced by the present version of the model.

## VI Conclusions

In this paper, we have suggested a simple way to build a stochastic volatility model that accounts for the presence of multiple time scales in financial markets. The volatility correlation function contains at least a ‘short’ time scale (tens of days) and a very long time scale that does not seem to be present in the asymmetric return-volatility, which only exhibits the ‘short’ time scale. The idea is to let the ‘normal’ level of volatility be itself time dependent and evolve over long time scales. The simplest setting is that of the linear Ornstein-Uhlenbeck model, where the calculations are simple Stein ; schobel ; perello2 , and which can easily be calibrated to market data. The overall description of the volatility and the leverage correlation using this three dimensional model is quite satisfactory, although several deficiencies remain: (a) the volatility process appears to need at least a third, very short time scale (on the order of a day), to be satisfactorily accounted for, (b) the empirical distribution of volatility is poorly reproduced by the present Gaussian model, and (c) the assumption that $`dW_1`$ is Gaussian does not allow one to account for extreme events. There are several natural extensions of the present model that could deal with these discrepancies: (i) one could generalize the Heston model as is done here, such as to avoid the unrealistic ‘hump’ of the volatility distribution close to zero; (ii) one could consider a model where the log-volatility, rather than the volatility, obeys an Ornstein-Uhlenbeck process, and (iii) one could build a ‘Matrioshka doll’ Ornstein-Uhlenbeck process where the construction given here is iterated as many times as needed to reproduce all the empirical time scales. In the limit of an infinite number of time scales, it might be possible to construct in an alternative way the multifractal random walk of Bacry, Muzy and Delour. Finally, it would be useful to extend the computation of the present paper to compute the conditional distribution of price changes over different time scales, such as to obtain option prices. We hope to report the results of this computation in the near future.

###### Acknowledgements.

This work has been supported in part by Dirección General de Investigación under contract No. BFM2000-0795 and by Generalitat de Catalunya under contract No. 2000 SGR-00023. J-P B wants to thank M. Potters, A. Matacz, F. Selmi and V. Yakovenko for several useful discussions.

## Appendix A The Novikov theorem

The Novikov theorem provides a way of evaluating averages involving the Wiener process and functionals of it. Suppose we have a well-behaved function of time $`f(t;[𝝃])`$ also depending functionally on an $`n`$-dimensional Gaussian white noise $`𝝃(t)=(\xi _1(t),\mathrm{},\xi _n(t))`$. The Novikov theorem (see Ref. novikov  for further details) states that the nonlinear average $`f(t;[𝝃])\xi _j(t^{})`$ can be written as

$$f(t;[𝝃])\xi _j(t^{})=\frac{\delta f(t;[𝝃])}{\delta \xi _j(t^{})},(j=1,2,3,\mathrm{}),$$
(51)
where $`\delta f(t;[𝝃])/\delta \xi _j(t^{})`$ stands for the functional derivative of $`f`$ with respect to $`𝝃`$ hanggi . We can write an alternative, and sometimes more convenient form of the theorem if we specify the correlation between the $`n`$ components of $`𝝃(t)`$:

$$\xi _i(t_1)\xi _j(t_2)=\rho _{ij}\delta (t_1t_2).$$

One can easily see that in this case we can write

$$\xi _i(t)=\xi (t)+\underset{ji}{}\rho _{ij}\xi _j(t),$$
(52)
where $`\xi (t)`$ is a Gaussian white noise independent of any other component of $`𝝃(t)`$, i.e., $`\xi (t)\xi _j(t^{})=0`$ for any $`ji`$ and $`t^{}`$. On the other hand the chain rule applied to the functional derivative allows us to write hanggi

$$\frac{\delta f(t;[𝝃])}{\delta \xi _j(t^{})}=𝑑t^{\prime \prime }\underset{i=1}{\overset{n}{}}\frac{\delta f(t;[𝝃])}{\delta \xi _i(t^{\prime \prime })}\frac{\xi _i(t^{\prime \prime })}{\xi _j(t^{})}.$$

Then, taking into account Eq. (52), the Novikov theorem can be set in the following alternative form:

$$f(t;[𝝃])\xi _j(t^{})=\underset{i=1}{\overset{n}{}}\rho _{ij}\frac{\delta f(t;[𝝃])}{\delta \xi _i(t^{})}.$$
(53)
We are now able to prove Eq. (28). In this case we have to consider the average $`\sigma (t)\sigma (t+\tau )^2\xi _1(t)`$. Consequently $`f(t;[𝝃])=\sigma (t)\sigma (t+\tau )^2`$ and the Novikov theorem, in the form given by Eq. (51), tell us that

$$\sigma (t)\sigma (t+\tau )^2\xi _1(t)=\frac{\delta \left[\sigma (t)\sigma (t+\tau )^2\right]}{\delta \xi _1(t)}.$$
(54)
On the other hand we know from Eq. (14) that

$$\sigma (t)=m_0+k_{\mathrm{}}^t\xi _2(t^{})e^{\alpha (tt^{})}𝑑t^{}+\frac{k_0}{1\lambda }_{\mathrm{}}^t\xi _3(t^{})\left[e^{\alpha _0(tt^{})}e^{\alpha (tt^{})}\right]𝑑t^{},$$
(55)
where the integrals are represented in the Itô sense. Observe that $`\sigma (t)`$ depends functionally on $`\xi _2(t)`$ and $`\xi _3(t)`$ but not on $`\xi _1(t)`$ and, as it is shown by Eq. (12), $`\xi _1(t)`$ and $`\xi _2(t)`$ are the only two correlated process with correlation coefficient $`\rho `$. Thus, the functional derivative reads

$$\frac{\delta \left[\sigma (t)\sigma (t+\tau )^2\right]}{\delta \xi _1(t)}=\rho \frac{\delta \left[\sigma (t)\sigma (t+\tau )^2\right]}{\delta \xi _2(t)},$$

where we have used Eq. (52) to see that $`\xi _2(t)/\xi (t)_1=\rho `$. Therefore,

$$\frac{\delta \left[\sigma (t)\sigma (t+\tau )^2\right]}{\delta \xi _1(t)}=\rho \left[\sigma (t+\tau )^2\frac{\delta \sigma (t)}{\delta \xi _2(t)}+2\sigma (t)\sigma (t+\tau )\frac{\delta \sigma (t+\tau )}{\delta \xi _2(t)}\right].$$
(56)
The functional derivatives of $`\sigma (t)`$ and $`\sigma (t+\tau )`$ with respect to $`\xi _2(t)`$ can be obtained through Eq. (55) after taking into account that $`\xi _3(t)`$ is independent of $`\xi _2(t)`$ and that $`\delta \xi _2(t^{})/\delta \xi _2(t)=\delta (tt^{})`$ hanggi . Thus

$$\frac{\delta \sigma (t)}{\delta \xi _2(t)}=k\text{H}(0)=0,$$
(57)
since $`H(0)=0`$ (cf. Eq. (27)). Note that this is consistent with the Itô interpretation which assumes that $`\xi _2(t)`$ lies outside of the integration interval $`(\mathrm{},t)`$ of the first integral on the rhs of Eq. (55). Analogously

$$\frac{\delta \sigma (t+\tau )}{\delta \xi _2(t)}=ke^{\alpha \tau }\text{H}(\tau ).$$
(58)
Finally, from Eq (56), we have

$$\sigma (t)\sigma (t+\tau )^2\xi _1(t)=2\rho ke^{\alpha \tau }\sigma (t)\sigma (t+\tau )\text{H}(\tau ),$$

which proves Eq. (28).

## Appendix B Derivation of Equation (42)

We will demonstrate the equality

$$\frac{dX(t)^2dX(t+\tau )^2dX(t)^2dX(t+\tau )^2}{\sqrt{\text{Var}[dX(t)^2]}\sqrt{\text{Var}[dX(t+\tau )^2]}}=\frac{\sigma (t)\sigma (t+\tau )^2\sigma (t)^4}{4\sigma (t)^2^23\sigma (t)^4},$$
(59)
which is equivalent to prove Eq. (42) from Eq. (41). To this end we will deal with each term on the left hand side of Eq. (59) separately.

We first derive $`dX(t)^2dX(t+\tau )^2`$. From Eq. (3) we have

$$dX(t)^2dX(t+\tau )^2=\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)dt^2,$$
(60)
where we have assumed that $`dW_1(t+\tau )`$ is independent of the rest of stochastic variables and also that $`dW_1(t+\tau )^2=dt`$. Since $`dW_1(t)=\xi _1(t)dt`$ we can write the average on the rhs of Eq. (60) as $`\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)`$. Now the Novikov theorem, Eqs. (51) and (53), yields

$`\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)=2\rho \left[{\displaystyle \frac{\delta \sigma (t)}{\delta \xi _2(t)}}\sigma (t)\sigma (t+\tau )^2dW_1(t)+\sigma (t)^2\sigma (t+\tau ){\displaystyle \frac{\delta \sigma (t+\tau )}{\delta \xi _2(t)}}dW_1(t)\right]`$
$`+\sigma (t)^2\sigma (t+\tau )^2{\displaystyle \frac{\delta [dW_1(t)]}{\delta \xi _1(t)}},`$
which, after using Eqs. (57)-(58), reads

$`\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)=2\rho ke^{\alpha \tau }\text{H}(\tau )\sigma (t)^2\sigma (t`$ $`+`$ $`\tau )dW_1(t)+\sigma (t)^2\sigma (t+\tau )^2{\displaystyle \frac{\delta [dW_1(t)]}{\delta \xi _1(t)}}.`$
In order to obtain an expression for the functional derivative $`\delta [dW_1(t)]/\delta \xi _1(t)`$, we write $`dW_1(t)`$ in a somewhat intricate form

$$dW_1(t)=_t^{t+dt}\xi _1(t^{})𝑑t^{}.$$

Thus

$$\frac{\delta [dW_1(t)]}{\delta \xi _1(t)}=_t^{t+dt}\delta (tt^{})𝑑t^{}=1.$$

Hence

$$\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)=2\rho ke^{\alpha \tau }\text{H}(\tau )\sigma (t)\sigma (t+\tau )^2dW_1(t)+\sigma (t)^2\sigma (t+\tau )^2.$$
(61)
We apply again the Novikov theorem to the average $`\sigma (t)\sigma (t+\tau )^2dW_1(t)`$ with the result

$$\sigma (t)\sigma (t+\tau )^2dW_1(t)=\rho \frac{\delta }{\delta \xi _2(t)}[\sigma (t)^2\sigma (t+\tau )]dt,$$

which, after using Eqs. (57)-(58), yields

$$\sigma (t)^2\sigma (t+\tau )dW_1(t)=\rho ke^{\alpha \tau }\text{H}(\tau )\sigma (t)^2dt.$$

Substituting this into Eq. (61) we have

$$\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)=2\rho ^2k^2e^{2\alpha \tau }\text{H}(\tau )\sigma (t)^2dt+\sigma (t)^2\sigma (t+\tau )^2.$$

Notice that due to the differential $`dt`$, the first term on the rhs of this equation is negligible in front of the second term. Thus

$$\sigma (t)^2\sigma (t+\tau )^2dW_1(t)\xi _1(t)=\sigma (t)^2\sigma (t+\tau )^2+\text{O}(dt),$$
(62)
and the substitution of Eq. (62) into Eq. (60) yields

$$dX(t)^2dX(t+\tau )^2=\left[\sigma (t)^2\sigma (t+\tau )^2+\text{O}(dt)\right]dt^2.$$
(63)
On the other hand, since $`dW_1(t)`$ is independent of $`\sigma (t)`$ we can write

$$dX(t)^2dX(t+\tau )^2=\sigma (t)^2\sigma (t+\tau )^2dt^2$$

and, taking into account that process is in the stationary regime, we have

$$dX(t)^2dX(t+\tau )^2=\sigma (t)^2^2dt^2.$$
(64)
Finally, we derive the variance:

$$\text{Var}[dX(t)^2]=\sigma (t)^4dW(t)^4\sigma (t)^2^2dW(t)^2^2,$$

where we take into account that $`\sigma (t)`$ and $`dW_1(t)`$ are independent. We can go further since $`dW(t)^4=3dW(t)^2^2=3dt^2`$. Hence,

$$\text{Var}[dX(t)^2]=3\sigma (t)^4dt^2\sigma (t)^2^2dt^2,$$
(65)
and, due to the fact we are dealing with process in the stationary regime, the same result applies to the variance $`\text{Var}[dX(t+\tau )^2]`$.

Therefore, from Eqs. (63), (64) and (65), we have that correlation function given by Eq. (59) is

$$\text{Corr}\left[dX(t)^2dX(t+\tau )^2\right]=\frac{\sigma (t)^2\sigma (t+\tau )^2\sigma (t)^2^2}{3\sigma (t)^4\sigma (t)^2^2}+\text{O}(dt).$$
(66)
This expression contains two terms which must be also derived: $`\sigma (t)^2\sigma (t+\tau )^2`$ and $`\sigma (t)^4`$. Again, these terms can be obtained with the help of Novikov theorem. Lengthy and tedious calculations allow us write them in terms of other expressions presented above (cf. Eqs. (19) and (20)). The first one is

$$\sigma (t)^2\sigma (t+\tau )^2=2\left[\sigma (t)\sigma (t+\tau )^2\sigma (t)^4\right]+\sigma (t)^2^2,$$

while the second one is obtained from the first one by assuming $`\tau =0`$. That is:

$$\sigma (t)^4=3\sigma (t)^2^22\sigma (t)^4,$$
(67)
If we insert these averages to the correlation (66), we prove the equality given by Eq. (59) and finally obtain Eq. (42).

## Appendix C An alternative noise correlation

We recall that our model is given by a three-dimensional random process (8)–(10)

$`dX(t)=\sigma (t)dW_1(t),`$
$`d\sigma (t)=\alpha [\sigma (t)m(t)]dt+kdW_2(t),`$
$`dm(t)=\alpha _0[m(t)m_0]dt+k_0dW_3(t),`$
where $`dW_i(t)=\xi _i(t)dt`$ $`(i=1,2,3)`$ are Wiener processes, i.e., $`\xi _i(t)`$ are zero-mean Gaussian white noises with cross-correlation given by $`\xi _i(t)\xi _j(t^{})=\rho _{ij}\delta (tt^{}).`$ Note that $`\rho _{ij}=\rho _{ji}`$ and $`\rho _{ii}=1`$. We have supposed that $`W_3(t)`$ is independent of $`W_1(t)`$ and $`W_2(t)`$. And we also have assumed that there exists a non zero correlation between $`W_1(t)`$ and $`W_2(t)`$ that was quantified by the parameter $`\rho `$.

This appendix modifies this framework by changing the existing correlations betweeen the Wiener processes $`W_i`$ ($`i=1,2,3`$). We want to analyze the consequences on the model when we allow correlations between $`W_1(t)`$ and $`W_3(t)`$ instead of between $`W_1(t)`$ and $`W_2(t)`$. In this case, the correlation matrix is

$$(\rho _{ij})=\left(\begin{array}{ccc}1& 0& \rho \\ 0& 1& 0\\ \rho & 0& 1\end{array}\right)$$
(68)
where, again, $`1\rho 1`$.

One can easily see that this change in the correlation matrix does not affect most of the main statistical properties of the model although there is one important property that is modified: the leverage correlation.

According to the definition (22), the leverage correlation is quantified by

$$(\tau )\frac{1}{Z}dX(t+\tau )^2dX(t)$$
(69)
where $`X(t)`$ is the zero-mean return and $`Z=dX(t)^2^2=m_0^4(1+\nu ^2+\widehat{\nu }_0^2)^2dt^2`$ (cf. Eq. (29)). We need to calculate the correlation

$$dX(t+\tau )^2dX(t)=H(\tau )\sigma (t)dW_1(t)\sigma (t+\tau )^2dW_1(t+\tau )^2.$$

Its derivation is similar to the one given in Section III. Since we follow the Itô convention, $`dW_1(t+\tau )`$ is independent of the rest of variables when $`\tau >0`$. This fact and the averages $`dW_1(t)=0`$ and $`dW_1(t)^2=dt`$ allow us to show that

$$dX(t+\tau )^2dX(t)=\sigma (t)\sigma (t+\tau )^2dW_1(t)H(\tau )dt,$$

where $`H(\tau )`$ is the Heaviside step function given by Eq. (27). The next step of the calculation needs to apply the Novikov theorem enunciated in Appendix A, although now its result appears to be different from the one given by Eq. (28) since the correlation is between $`W_1(t)`$ and $`W_3(t)`$. In the present case the Novikov theorem given by Eq. (53) allows us to write

$$\sigma (t)\sigma (t+\tau )^2dW_1(t)=\underset{i=1}{\overset{3}{}}\rho _{1i}\frac{\delta [\sigma (t)\sigma (t+\tau )^2]}{\delta \xi _i(t^{})}dt.$$
(70)
On the other hand we know from Eq. (14) that

$$\sigma (t)=m_0+k_{\mathrm{}}^t\xi _2(t^{})e^{\alpha (tt^{})}𝑑t^{}+\frac{k_0}{1\lambda }_{\mathrm{}}^t\xi _3(t^{})\left[e^{\alpha _0(tt^{})}e^{\alpha (tt^{})}\right]𝑑t^{},$$
(71)
where the integrals are represented in the Itô sense. Since volatility (71) does not depend on $`\xi _1`$ and the only two non zero contributions correspond to $`\rho _{11}=1`$ and $`\rho _{13}=\rho `$ (c.f. Eq. (68)),

$$\sigma (t)\sigma (t+\tau )^2dW_1(t)=2\rho \sigma (t)\frac{\delta \sigma (t+\tau )}{\delta \xi _3(t^{})}dt.$$
(72)
But from Eq. 71

$$\frac{\delta \sigma (t+\tau )}{\delta \xi _3(t)}=\frac{k_0}{1\lambda }\left(e^{\alpha _0\tau }e^{\alpha \tau }\right)\text{H}(\tau ),$$
(73)
and $`\sigma (t)=m_0`$. Hence the leverage correlation given by Eq. (69) reads

$$\overline{}(\tau )=\text{H}(\tau )\overline{A}(\tau )(e^{\alpha _0\tau }e^{\alpha \tau }),$$
(74)
where

$$\overline{A}(\tau )\frac{2\rho \nu _0\sqrt{2\alpha _0}}{m_0(1\lambda )\left(1+\nu ^2+\widehat{\nu }_0^2\right)^2}\left[1+\left(\nu ^2\frac{\widehat{\nu }_0^2\lambda }{1\lambda }\right)e^{\alpha \tau }+\frac{\widehat{\nu }_0^2}{1\lambda }e^{\alpha _0\tau }\right].$$
(75)
We now compare the two leverage correlations $`(\tau )`$ and $`\overline{}(\tau )`$. In Section III, we obtained $`(\tau )`$ given by Eqs. (30)–(31) and see that the limit $`(0^+)`$ goes to a certain negative value. In contrast, in the present alternative model, $`\overline{}(0^+)=0`$. In Fig. 5, we see that leverage of the Dow-Jones index goes to $`11.9`$ when $`\tau 0^+`$. Hence, this alternative model is in clear contradiction with empirical observations. In addition, we also observe in Fig. 5 that $`\overline{}(\tau )`$ has a longer range than the one observed in the Dow-Jones index. The reason for this being is that the exponential time decay of the leverage function (75) is dominated by the same parameter as to the case of the volatility autocorrelation (43). Thus, in the present case, leverage and volatility correlations have the same long range persistence and this is also in clear contradiction with the empirical results telling us that leverage has a much shorter memory than the volatility (see and compare Figs. 1 and 5).