Explicit solutions to quadratic BSDEs and applications to utility maximization in multivariate affine stochastic volatility models

DOI10.1016/J.SPA.2014.05.004zbMATH Open1297.60040arXiv1201.2877OpenAlexW2022550849MaRDI QIDQ404585FDOQ404585

Anja Richter

Publication date: 4 September 2014

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: Over the past few years quadratic Backward Stochastic Differential Equations (BSDEs) have been a popular field of research. However there are only very few examples where explicit solutions for these equations are known. In this paper we consider a class of quadratic BSDEs involving affine processes and show that their solution can be reduced to solving a system of generalized Riccati ordinary differential equations. In other words we introduce a rich and flexible class of quadratic BSDEs which are analytically tractable, i.e. explicit up to the solution of an ODE. Our results also provide analytically tractable solutions to the problem of utility maximization and indifference pricing in multivariate affine stochastic volatility models. This generalizes univariate results of Kallsen and Muhle-Karbe and some results in the multivariate setting of Leippold and Trojani by establishing the full picture in the multivariate affine jump-diffusion setting. In particular we calculate the interesting quantity of the power utility indifference value of change of numeraire. Explicit examples in the Heston, Barndorff-Nielsen-Shephard and multivariate Heston setting are calculated.

Full work available at URL: https://arxiv.org/abs/1201.2877

Recommendations

• Quadratic BSDEs driven by a continuous martingale and applications to the utility maximization problem
• Explicit solutions of quadratic FBSDEs arising from quadratic term structure models
• A new existence result for quadratic BSDEs with jumps with application to the utility maximization problem
• A characterization of solutions of quadratic BSDEs and a new approach to existence
• A stability approach for solving multidimensional quadratic BSDEs
• Minimal and maximal bounded solutions for quadratic BSDEs with stochastic conditions
• Quadratic BSDEs with jumps: a fixed-point approach
• Multidimensional quadratic and subquadratic BSDEs with special structure
• scientific article; zbMATH DE number 6013731
• 44th seminar on probability. Including papers from the `Journées de Probabilités', Dijon, France, June 2010

zbMATH Keywords

stochastic volatilityutility maximizationexplicit solutionaffine processesWishart processesquadratic BSDEs

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Cites Work

• Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics. (With discussion)
• A theory of the term structure of interest rates
• A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
• Title not available (Why is that?)
• Conjugate convex functions in optimal stochastic control
• Affine processes and applications in finance
• Backward stochastic differential equations and partial differential equations with quadratic growth.
• Quadratic BSDEs driven by a continuous martingale and applications to the utility maximization problem
• Utility maximization in incomplete markets
• A regression-based Monte Carlo method to solve backward stochastic differential equations
• A new existence result for quadratic BSDEs with jumps with application to the utility maximization problem
• Backward Stochastic Differential Equations in Finance
• Adapted solution of a backward stochastic differential equation
• Numerical simulation of BSDEs with drivers of quadratic growth
• Wishart processes
• Path regularity and explicit convergence rate for BSDE with truncated quadratic growth
• Option pricing when correlations are stochastic: an analytical framework
• Besides with stochastic Lipschitz condition and quadratic PDEs in Hilbert spaces
• Discrete-time approximation and Monte-Carlo simulation of backward stochastic differential equations
• A multifactor volatility Heston model
• Bounded solutions to backward SDEs with jumps for utility optimization and indifference hedging
• Title not available (Why is that?)
• Merton's portfolio optimization problem in a Black and Scholes market with non‐Gaussian stochastic volatility of Ornstein‐Uhlenbeck type
• Affine processes on positive semidefinite matrices
• Title not available (Why is that?)
• A characterization of the martingale property of exponentially affine processes
• Equivalent and absolutely continuous measure changes for jump-diffusion processes
• A complete explicit solution to the log-optimal portfolio problem.
• BSDEs and applications
• A forward scheme for backward SDEs
• HEDGING (CO)VARIANCE RISK WITH VARIANCE SWAPS
• Optimal Portfolios for Financial Markets with Wishart Volatility
• Handbook of mathematics. Translated from the Russian. With 1 CD-ROM
• THE MULTIVARIATE supOU STOCHASTIC VOLATILITY MODEL
• The opportunity process for optimal consumption and investment with power utility
• Exponentially affine martingales, affine measure changes and exponential moments of affine processes
• Regularity and representation of viscosity solutions of partial differential equations via backward stochastic differential equations
• Title not available (Why is that?)
• UTILITY MAXIMIZATION IN AFFINE STOCHASTIC VOLATILITY MODELS

Cited In (14)

• BSDE approach to utility maximization with square-root factor processes
• Existence and uniqueness results for BSDE with jumps: the whole nine yards
• Title not available (Why is that?)
• Explicit Solutions of Quadratic FBSDEs Arising From Quadratic Term Structure Models
• Optimal portfolios when variances and covariances can jump
• Long-term yield in an affine HJM framework on \(S_{d}^{+}\)
• Quadratic BSDEs driven by a continuous martingale and applications to the utility maximization problem
• On moment non-explosions for Wishart-based stochastic volatility models
• Dual control Monte-Carlo method for tight bounds of value function under Heston stochastic volatility model
• Long-Term Optimal Investment in Matrix Valued Factor Models
• Polynomial affine approach to HARA utility maximization with applications to OrnsteinUhlenbeck \(4/2\) models.
• Stability and analytic expansions of local solutions of systems of quadratic BSDEs with applications to a price impact model
• Mean-field anticipated BSDEs driven by time-changed Lévy noises
• A convolution method for numerical solution of backward stochastic differential equations

This page was built for publication: Explicit solutions to quadratic BSDEs and applications to utility maximization in multivariate affine stochastic volatility models

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q404585)