scientific article; zbMATH DE number 1210652
The author studies a frictionless security market model \((B_t, S_t)\) \((0\leq t\leq T)\) where the stock price process \(S=(S_t)\) satisfies a stochastic differential equation (SDE) of the form \[ dS_t= \mu(t,S_t) dt+\sigma (t,S_t) dW_t,\quad S_0>0 \text{ and } 0\leq t\leq T, \] admitting a unique strictly positive solution. The bond price process is given by \[ B_t= \text{exp}\left \{\int^t_0 r(u,S_u) du \right\}, \quad 0\leq t\leq T \] \((W\) being a standard Wiener process defined on some probability space \((\Omega, {\mathcal A},P))\). It is assumed that there exists a unique probability measure \(P^*\) such that \(S^*_t= S_t/B_t\) \((0\leq t\leq T)\) is a \(P^*\)-martingale. Let \(C_t\) denote the arbitrary price at time \(t\) of a \(P^*\)-integrable contingent claim \(X_T\). In the case where \(X_T=g(S_T)\), the Markov property of \((S_t)\) implies that \(C_t=U(t,S_t)\) \((0\leq t\leq T)\) for some function \(U:[0,T] \times R_+ \to R\). One strategy to calculate \(C_t\) \((0\leq t\leq T)\) is to obtain a PDE for \(U\) with boundary condition \(U(T,x)= g(x)\). The author derives conditions which are necessary and sufficient for a function \(f:[0,T]\times R_+\to R\) to be such that \(f(t,S_t)\) \((0\leq t\leq T)\) is an Itô process (this involves a notion of differentiability in a generalized sense). As a consequence, a generalized Black-Scholes equation is obtained.
- Backward stochastic partial differential equations related to utility maximization and hedging
- A generalized Black-Scholes equation without Itô calculus
- Derivation of the Black–Scholes Equation from Basic Principles
- scientific article; zbMATH DE number 1383617 (Why is no real title available?)
- Asset pricing with stochastic volatility
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