Nonlinear Parabolic Equations Arising in Mathematical Finance
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Black-Scholes theory extensionnonlinear parabolic equationsstochastic dynamic portfolio optimization
PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Finite volume methods for initial value and initial-boundary value problems involving PDEs (65M08) Portfolio theory (91G10) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Optimal stochastic control (93E20)
Abstract: This survey paper is focused on qualitative and numerical analyses of fully nonlinear partial differential equations of parabolic type arising in financial mathematics. The main purpose is to review various non-linear extensions of the classical Black-Scholes theory for pricing financial instruments, as well as models of stochastic dynamic portfolio optimization leading to the Hamilton-Jacobi-Bellman (HJB) equation. After suitable transformations, both problems can be represented by solutions to nonlinear parabolic equations. Qualitative analysis will be focused on issues concerning the existence and uniqueness of solutions. In the numerical part we discuss a stable finite-volume and finite difference schemes for solving fully nonlinear parabolic equations.
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Cited in
(8)- A constructive method for convex solutions of a class of nonlinear Black-Scholes equations
- Probabilistic approach to solution of nonlinear PDEs arising in financial mathematics
- Existence and uniqueness of solutions to a quasilinear parabolic equation with quadratic gradients in financial markets
- A non-local free boundary problem arising in a theory of financial bubbles
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