A pseudospectral method for option pricing with transaction costs under exponential utility (Q2029418)
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English | A pseudospectral method for option pricing with transaction costs under exponential utility |
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A pseudospectral method for option pricing with transaction costs under exponential utility (English)
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3 June 2021
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The following dynamic model is known on the assumption that an investor holds an amount \(\overline X(t)\) in the bank account and \(\overline y(t)\) shares of a certain stock \(\overline S(t)\) \[ \begin{array}{l} d\overline X(t)=r \overline X(t)dt - (1+\lambda)\overline S(t)d\overline L(t)+(1-\mu)\overline S(t)d\overline M(t),\\ d\overline y(t)=d \overline L(t)-d\overline M(t),\\ d\overline S(t)=\overline S(t) \alpha dt+\overline S(t) \sigma dz_t,\\ \end{array} \] where \(r\) is the constant risk-free rate, \(\alpha\) is the constant expected rate of return of the stock, \(\sigma>0\) is the constant volatility of the stock and \(z_t\) is the standard Brownian motion. \(\overline L(t)\) and \(\overline M(t)\) are adapted, right-continuous, nonnegative and nondecreasing processes. The authors propose two changes of variables that reduce the impact of the exponential growth and a Fourier pseudospectral method to solve the resulting nonlinear equation. Numerical analysis of the stability of the method is included.
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option pricing
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exponential utility
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transaction costs
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spectral method
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