Application of microlocal analysis to an inverse problem arising from financial markets

DOI10.1088/1361-6420/AADE25MaRDI QIDQ4687571zbMATH OpenOpenAlexWikidataFDO

Authors Shin-ichi Doi, Yasushi Ota

Publication date 12 October 2018

Published in Inverse Problems (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1404.7018

zbMATH Keywords

FBI transformfinancial modelmicrolocal analysis

Mathematics Subject Classification ID

Inverse problems for PDEs (35R30) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: One of the most interesting problems discerned when applying the Black--Scholes model to financial derivatives, is reconciling the deviation between expected and observed values. In our recent work, we derived a new model based on the Black--Scholes model and formulated a new mathematical approach to an inverse problem in financial markets. In this paper, we apply microlocal analysis to prove a uniqueness of the solution to our inverse problem. While microlocal analysis is used for various models in physics and engineering, this is the first attempt to apply it to a model in financial markets. First, we explain our model, which is a type of arbitrage model. Next we illustrate our new mathematical approach, and then for space-dependent real drift, we obtain stable linearization and an integral equation. Finally, by applying microlocal analysis to the integral equation, we prove our uniqueness of the solution to our new mathematical model in financial markets.

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Cites work

• An introduction to semiclassical and microlocal analysis
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Cited in

(4)

• Parameters identification for an inverse problem arising from a binary option using a Bayesian inference approach
• Uniqueness, stability and numerical methods for the inverse problem that arises in financial markets
• Bayesian inference approach to inverse problems in a financial mathematical model
• Inverse parabolic problem with the Heaviside function arising in finance

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