Convergence in multiscale financial models with non-Gaussian stochastic volatility

DOI10.1051/COCV/2015015MaRDI QIDQ2808055zbMATH OpenOpenAlexFDO

Authors Martino Bardi, Annalisa Cesaroni, Andrea Scotti

Publication date 26 May 2016

Published in European Series in Applied and Industrial Mathematics (ESAIM): Control, Optimization and Calculus of Variations (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1405.6514

zbMATH Keywords

Hamilton-Jacobi-Bellman equationjump processmean reverting volatilitymultiple scaleportfolio optimizationsingular perturbationstochastic control systemviscosity solution

Mathematics Subject Classification ID

Integro-partial differential equations (35R09) PDEs with randomness, stochastic partial differential equations (35R60) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Processes with independent increments; Lévy processes (60G51) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We consider stochastic control systems affected by a fast mean reverting volatility $Y(t)$ driven by a pure jump L'evy process. Motivated by a large literature on financial models, we assume that $Y(t)$ evolves at a faster time scale $fractvarepsilon$ than the assets, and we study the asymptotics as $varepsilono0$. This is a singular perturbation problem that we study mostly by PDE methods within the theory of viscosity solutions.

Review text

The authors consider stochastic control systems affected by a fast mean reverting volatility \(Y(t)\) driven by a pure jump Lévy process. The system is associated with the payoff functional containing a continuous function of quadratic growth that is the subject of the maximization among admissible control functions. The value function of this optimal control problem is considered as the solution of the integro-differential Hamilton-Jacobi-Bellman equation. The novelty of the paper is combining multiple scales and stochastic volatility with jumps. It is assumed that \(Y(t)\) evolves at a faster time scale \(\frac{t}{\epsilon}\) than the assets and asymptotics as \(\epsilon\rightarrow0\) is studied. So, this is a singular perturbation problem that is studied by the methods of partial differential equations within the theory of viscosity solutions.

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Cited in

(8)

• On a conjecture of De Giorgi related to homogenization
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• Large deviations for some fast stochastic volatility models by viscosity methods
• Convergence by viscosity methods in multiscale financial models with stochastic volatility
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• Large deviations for multi-scale jump-diffusion processes
• Large deviation principle for a two-time-scale McKean-Vlasov model with jumps
• Optimal convergence rates in the averaging principle for multiscale FBSDEs with Lipschitz coefficients

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