Results on numerics for FBSDE with drivers of quadratic growth

DOI10.1007/978-3-642-03479-4_9zbMATH Open1236.60068arXiv1004.2248OpenAlexW2146095861MaRDI QIDQ3000882FDOQ3000882

Gonçalo dos Reis, P. Imkeller, Jianing Zhang

Publication date: 31 May 2011

Published in: Contemporary Quantitative Finance (Search for Journal in Brave)

Abstract: We consider the problem of numerical approximation for forward-backward stochastic differential equations with drivers of quadratic growth (qgFBSDE). To illustrate the significance of qgFBSDE, we discuss a problem of cross hedging of an insurance related financial derivative using correlated assets. For the convergence of numerical approximation schemes for such systems of stochastic equations, path regularity of the solution processes is instrumental. We present a method based on the truncation of the driver, and explicitly exhibit error estimates as functions of the truncation height. We discuss a reduction method to FBSDE with globally Lipschitz continuous drivers, by using the Cole-Hopf exponential transformation. We finally illustrate our numerical approximation methods by giving simulations for prices and optimal hedges of simple insurance derivatives.

Full work available at URL: https://arxiv.org/abs/1004.2248

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zbMATH Keywords

forward-backward stochastic differential equationsconvergence analyis for numerical methodsexponential Cole-Hopf transformationpricing and hedging of derivatives on non-tradable underlyingsquadratic growth driverstruncation of the driverutility indifference approach

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to stochastic differential and integral equations (65C30)

Cited In (13)

• Numerical simulation of quadratic BSDEs
• Markovian quadratic and superquadratic BSDEs with an unbounded terminal condition
• Numerical simulation of BSDEs with drivers of quadratic growth
• An overview on deep learning-based approximation methods for partial differential equations
• Power Utility Maximization Problems Under Partial Information and Information Sufficiency in a Brownian Setting
• Path regularity and explicit convergence rate for BSDE with truncated quadratic growth
• Least-Squares Monte Carlo for Backward SDEs
• On Z-mean reflected BSDEs
• Decoupling on the Wiener Space, Related Besov Spaces, and Applications to BSDEs
• The Skorokhod embedding problem for inhomogeneous diffusions
• Numerical methods for backward stochastic differential equations: a survey
• Existence of global solutions for multi-dimensional coupled FBSDEs with diagonally quadratic generators
• Overcoming the curse of dimensionality in the numerical approximation of backward stochastic differential equations

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