A Yosida's parametrix approach to Varadhan's estimates for a degenerate diffusion under the weak Hörmander condition

DOI10.1016/J.JMAA.2022.126538MaRDI QIDQ2674299zbMATH OpenOpenAlexFDO

Authors Stefano Pagliarani, Sergio Polidoro

Publication date 23 September 2022

Published in Journal of Mathematical Analysis and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2105.03992

zbMATH Keywords

asymptotic estimateshypoelliptic diffusionAsian optionsparametrixweak Hörmander condition

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91)

Abstract: We adapt and extend Yosida's parametrix method, originally introduced for the construction of the fundamental solution to a parabolic operator on a Riemannian manifold, to derive Varadhan-type asymptotic estimates for the transition density of a degenerate diffusion under the weak H"ormander condition. This diffusion process, widely studied by Yor in a series of papers, finds direct application in the study of a class of path-dependent financial derivatives known as Asian options. We obtain the Varadhan formula �egin{equation} frac{-2 log p(t,x;T,y) } { Psi(t,x;T,y) } o 1, qquad ext{as } quad T-t o 0^+, end{equation} where $p$ denotes the transition density and $Psi$ denotes the optimal cost function of a deterministic control problem associated to the diffusion. We provide a partial proof of this formula, and present numerical evidence to support the validity of an intermediate inequality that is required to complete the proof. We also derive an asymptotic expansion of the cost function $Psi$, expressed in terms of elementary functions, which is useful in order to design efficient approximation formulas for the transition density.

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Cited in

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• Left-invariance for smooth vector fields and applications
• Harnack inequality and asymptotic lower bounds for the relativistic Fokker-Planck operator
• Optimal regularity for degenerate Kolmogorov equations in non-divergence form with rough-in-time coefficients

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