Generation of analytic semigroups and domain characterization for degenerate elliptic operators with unbounded coefficients arising in financial mathematics. I. (Q1850198)

The authors investigate a problem related to the generation of analytic semigroups in \(L^2(\mathbb{R}^d)\) and the characterization of the domain, for a family of degenerate elliptic operators with unbounded coefficients. The aforementioned class of operators includes some operators that appear in mathematical finance. In particular, the authors highlight the following three aspects of the aforementioned problem. Firstly, they consider the family of degenerate elliptic operators with unbounded coefficients that satisfy certain growth and compensation conditions. Next, under additional stronger assumptions, they characterize the domain. Finally, they apply the obtained results to situations that arise in the financial context. The paper is arranged in four sections with the first being introductory in nature. Section 2 provides an introduction to the notation. Also, in this section, some familiar results on weighted spaces and analytic semigroups are revisited. The third section constitutes the most important part of the paper and is subdivided into four subsections. In the first of these subsections, the authors consider the case of a second-order differential operator, \(\widehat{\mathcal{A}}\) in \(L^2,\) that is represented in variational form. Furthermore, under certain growth and compensation assumptions, the generation of the analytic semigroups is proved here with associated estimations being made for the first derivatives. In Subsection 3.2, the nonvariational analogue, \(\mathcal{A}\) (formal second-order differential operator) in \(L^2,\) of the operator \(\widehat{\mathcal{A}}\) encountered in the previous subsection is discussed. Also, for this case, the authors demonstrate how to generate analytic semigroups and find estimates for the first derivatives. The former is obtained by applying standard Hilbert-space techniques that are dependent on a priori estimates that are permitted by the compensation conditions mentioned earlier. In Subsection 3.3, the domain of the realization, \(\mathcal{A}_2,\) of \(\mathcal{A}\) in \(L^2,\) is characterized. This is achieved by a localization procedure adapted to the growth rate of the weights of the degenerate elliptic differential operators at infinity and on some negligible set. In Subsection 3.4, the authors discuss the problem of generating analytic semigroups on a weighted Sobolev space for a suitable modification of the operator \(\mathcal{A}\) mentioned in the above. In the final section, the authors apply the results obtained in the previous sections to elliptic operators that appear in mathematical finance. In this regard, they prove existence and uniqueness of the solution to the Cauchy problem associated with the operator \(\mathcal{A}\) and provide estimates of the zero-arbitrage price of its derivatives for an important class of contingent-claim contracts. The paper is well-written and of interest to both experts in differential operator theory and mathematical finance.