Error Calculus and Path Sensitivity in Financial Models

DOI10.1111/1467-9965.00009MaRDI QIDQ4409041zbMATH OpenOpenAlexFDO

Authors Nicolas Bouleau

Publication date 2003

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0610489

Mathematics Subject Classification ID

Stochastic calculus of variations and the Malliavin calculus (60H07) Financial applications of other theories (91G80)

Abstract: In the framework of risk management, for the study of the sensitivity of pricing and hedging in stochastic financial models to changes of parameters and to perturbations of the stock prices, we propose an error calculus which is an extension of the Malliavin calculus based on Dirichlet forms. Although useful also in physics, this error calculus is well adapted to stochastic analysis and seems to be the best practicable in finance. This tool is explained here intuitively and with some simple examples.

Recommendations

• Error calculus for finance and physics. The language of Dirichlet forms.
• Price sensitivities for a general stochastic volatility model
• Malliavin sensitivity analysis with polynomial growth payoff functions under the Black-Scholes model
• Pricing and hedging of financial derivatives using a posteriori error estimates and adaptive methods for stochastic differential equations
• Stochastic calculus of variations in mathematical finance.

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Cited in

(10)

• Error structures and parameter estimation.
• Donsker's theorem and Dirichlet forms.
• Differential calculus for Dirichlet forms: The measure-valued gradient preserved by image
• A priori error estimates for reduced order models in finance
• Stochastic sensitivity study for optimal credit allocation
• Dirichlet Forms in Simulation
• EVALUATING HEDGING ERRORS: AN ASYMPTOTIC APPROACH
• Price sensitivities for a general stochastic volatility model
• Bid-Ask Spread Modelling, a Perturbation Approach
• When and how an error yields a Dirichlet form

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