Results on numerics for FBSDE with drivers of quadratic growth

DOI10.1007/978-3-642-03479-4_9MaRDI QIDQ3000882zbMATH OpenOpenAlexFDO

Authors P. Imkeller, Gonçalo dos Reis, Jianing Zhang

Publication date 31 May 2011

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

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

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)

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.

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Cited in

(17)

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• An overview on deep learning-based approximation methods for partial differential equations
• Existence of global solutions for multi-dimensional coupled FBSDEs with diagonally quadratic generators
• On Z-mean reflected BSDEs
• The Skorokhod embedding problem for inhomogeneous diffusions
• Numerical methods for backward stochastic differential equations: a survey
• Numerical simulation of BSDEs with drivers of quadratic growth
• A note on comonotonicity and positivity of the control components of decoupled quadratic FBSDE
• 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
• Numerical simulation of quadratic BSDEs
• Least-squares Monte Carlo for backward SDEs
• Solving backward stochastic differential equations with quadratic-growth drivers by connecting the short-term expansions
• Explicit solutions of quadratic FBSDEs arising from quadratic term structure models
• Overcoming the curse of dimensionality in the numerical approximation of backward stochastic differential equations
• Differentiability of quadratic forward-backward SDEs with rough drift
• Markovian quadratic and superquadratic BSDEs with an unbounded terminal condition

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