Degenerate evolution equations in weighted continuous function spaces, Markov processes and the Black--Scholes equation. II. (Q1412400)

This contribution is the second in a two-paper series by the authors; the first part appeared [ibid., 193--211 (2002; Zbl 1059.47044), see the preceding review]. In this article, the authors apply the results from the first paper in order to study generation results for a wide class of degenerate second-order differential operators on real intervals of the form \[ Lu(x) := \alpha(x)u''(x) + \beta(x)u'(x) + \gamma(x)u(x) \] in the framework of weighted continuous function spaces when specific boundary conditions are imposed. Furthermore, the authors illustrate that the aforementioned operators generate positive strongly continuous semigroups which turn out to be the transition semigroups associated with suitable Markov processes. The differential operators referred to are useful when applied to the Black--Scholes equation. The paper has an introductory section that also lays down some notational conventions. In the second section, the properties of an incomplete operator with respect to the generation property and the existence of the relevant Markov process is studied. In Section 3, results corresponding to those for the incomplete operator are determined by means of perturbation techniques. The authors observe that the aforementioned results encapsulate some important probabilistic aspects. The fourth section is devoted to applying the methods and results from the preceding analysis to the Black--Scholes equation in the theory of option pricing. The authors provide sets of conditions for the existence and uniqueness of solutions of this equation, showing their continuous dependence on the initial data and growth rate at infinity.