Control of the Black-Scholes equation

DOI10.1016/J.CAMWA.2017.02.007zbMATH Open1371.91176arXiv1703.09206OpenAlexW2540929036MaRDI QIDQ2402001FDOQ2402001

Authors: Claire David 

Publication date: 6 September 2017

Published in: Computers & Mathematics with Applications (Search for Journal in Brave)

Abstract: There are hundreds of papers dealing with the Black-Scholes equation. Yet, no one seems to have ever used the scaling invariance coming from the heat equation. And there appears to be very few studies on the "control aspect" of the equation. In previous works, J.Y. Chemin and Cl. David obtained new results for the mass critical nonlinear Schr"odinger equation, with a simple principle: one uses the fact that for this nonlinear equation, solutions of scales which are different enough almost do not interact. The nonlinearity of the original equation just required to determine a condition about the size of the scale which depends continuously on the data. The idea is to apply the building technique of the map described above, starting from the point that the Black-Scholes equation can be transformed into a linear heat equation, which has a natural scaling invariance, and that the linearity of the transformed equation enables one to obtain exact solutions, and, thus, yield interesting results. The aim of this paper is to present a new way to change either the Delta, or other greeks, by a given amount ; this technique appears thus as a new way to control the equation, without resorting to control functions. Indeed, one can change the greeks directly using the general solution of the Black-Scholes equation, nevertheless, our technique appears as an alternative and simple one to implement.

Full work available at URL: https://arxiv.org/abs/1703.09206

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zbMATH Keywords

controlBlack-Scholes equationshape parameters

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Initial-boundary value problems for second-order parabolic equations (35K20) NLS equations (nonlinear Schrödinger equations) (35Q55)

Cites Work

• The pricing of options and corporate liabilities
• Title not available (Why is that?)
• High Frequency Approximation of Solutions to Critical Nonlinear Wave Equations
• Nonlinear Black-Scholes equations in finance: associated control problems and properties of solutions
• From an initial data to a global solution of the non-linear Schrödinger equation: a building process

Cited In (6)

• Title not available (Why is that?)
• Controllability and hedgibility of Black-Scholes equations with \(N\) stocks
• Controllabilty and stability analysis on a group associated with Black-Scholes equation
• On the solution of two-dimensional fractional Black-Scholes equation for European put option
• An inverse Black-Scholes problem
• The asymptotic behavior of the solutions of the Black-Scholes equation as volatility \(\sigma\rightarrow 0^+\)

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