Polynomial diffusions and applications in finance

DOI10.1007/S00780-016-0304-4MaRDI QIDQ331360zbMATHOpenAlexFDO

Authors Damir Filipović, Martin Larsson

Publication date 27 October 2016

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1404.0989

zbMATH Keywords

moment problemmathematical financeboundary attainmentpolynomial diffusionsstochastic invariance

Mathematics Subject Classification ID

Diffusion processes (60J60) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Actuarial science and mathematical finance (91G99)

Abstract: This paper provides the mathematical foundation for polynomial diffusions. They play an important role in a growing range of applications in finance, including financial market models for interest rates, credit risk, stochastic volatility, commodities and electricity. Uniqueness of polynomial diffusions is established via moment determinacy in combination with pathwise uniqueness. Existence boils down to a stochastic invariance problem that we solve for semialgebraic state spaces. Examples include the unit ball, the product of the unit cube and nonnegative orthant, and the unit simplex.

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