Study of the risk-adjusted pricing methodology model with methods of geometrical analysis

DOI10.1080/17442508.2010.489642zbMATH Open1234.35130arXiv0911.0113OpenAlexW2038335889MaRDI QIDQ3108366FDOQ3108366

Ljudmila A. Bordag

Publication date: 3 January 2012

Published in: Stochastics (Search for Journal in Brave)

Abstract: Families of exact solutions are found to a nonlinear modification of the Black-Scholes equation. This risk-adjusted pricing methodology model (RAPM) incorporates both transaction costs and the risk from a volatile portfolio. Using the Lie group analysis we obtain the Lie algebra admitted by the RAPM equation. It gives us the possibility to describe an optimal system of subalgebras and correspondingly the set of invariant solutions to the model. In this way we can describe the complete set of possible reductions of the nonlinear RAPM model. Reductions are given in the form of different second order ordinary differential equations. In all cases we provide solutions to these equations in an exact or parametric form. We discuss the properties of these reductions and the corresponding invariant solutions.

Full work available at URL: https://arxiv.org/abs/0911.0113

zbMATH Keywords

exact solutionssingular perturbationtransaction costsLie group analysisBlack-Scholes equationsinvariant reductions

Mathematics Subject Classification ID

PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Lie algebras of Lie groups (22E60) Symmetries, invariants, etc. in context of PDEs (35B06) Singular perturbations in context of PDEs (35B25) Nonlinear parabolic equations (35K55)

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Cited In (7)

• Group classification for a class of non-linear models of the RAPM type
• Pricing perpetual put options by the Black-Scholes equation with a nonlinear volatility function
• Title not available (Why is that?)
• Optimal system, symmetry reductions and new closed form solutions for the geometric average Asian options
• Models of self-financing hedging strategies in illiquid markets: symmetry reductions and exact solutions
• Nonlinear Parabolic Equations Arising in Mathematical Finance
• The optimal rehedging interval for the options portfolio within the RAPM, taking into account transaction costs and liquidity costs

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