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 equationportfolio optimizationsingular perturbationviscosity solutionjump processstochastic control systemmultiple scalemean reverting volatility

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) 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) 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.

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Cited in

(6)

• Large deviations for some fast stochastic volatility models by viscosity methods
• Convergence by viscosity methods in multiscale financial models with stochastic volatility
• Large deviations for multi-scale jump-diffusion processes
• Periodic homogenization for weakly elliptic Hamilton-Jacobi-Bellman equations with critical fractional diffusion
• Large deviations for a slow-fast system with jump-diffusion processes
• On a conjecture of De Giorgi related to homogenization

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