Valuation equations for stochastic volatility models

DOI10.1137/110842302zbMATH Open1255.91125arXiv1004.3299OpenAlexW1968171823MaRDI QIDQ4902218FDOQ4902218

Authors: Erhan Bayraktar, Constantinos Kardaras, Hao Xing 

Publication date: 25 January 2013

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We analyze the valuation partial differential equation for European contingent claims in a general framework of stochastic volatility models where the diffusion coefficients may grow faster than linearly and degenerate on the boundaries of the state space. We allow for various types of model behavior: the volatility process in our model can potentially reach zero and either stay there or instantaneously reflect, and the asset-price process may be a strict local martingale. Our main result is a necessary and sufficient condition on the uniqueness of classical solutions to the valuation equation: the value function is the unique nonnegative classical solution to the valuation equation among functions with at most linear growth if and only if the asset-price is a martingale.

Full work available at URL: https://arxiv.org/abs/1004.3299

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zbMATH Keywords

stochastic volatility modelsstrict local martingalesFeynman-Kac theoremnecessary and sufficient conditions for uniquenessvaluation equations

Mathematics Subject Classification ID

PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Initial-boundary value problems for second-order parabolic equations (35K20) Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Cited In (22)

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• A valuation model for firms with stochastic earnings
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• Diffusion transformations, Black-Scholes equation and optimal stopping
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• On the martingale property in stochastic volatility models based on time-homogeneous diffusions
• On backward stochastic differential equations and strict local martingales
• General Solution of the Stochastic Price-Dividend Integral Equation: A Theory of Financial Valuation
• Large deviation principle for Volterra type fractional stochastic volatility models
• Singular risk-neutral valuation equations
• The Black-Scholes equation in stochastic volatility models
• Martingales versus PDEs in finance: an equivalence result with examples
• On changes of measure in stochastic volatility models
• Risk measures for processes and BSDEs
• On contingent-claim valuation in continuous-time for volatility models of Ornstein-Uhlenbeck type
• Simple examples of pure-jump strict local martingales
• Mild to classical solutions for XVA equations under stochastic volatility
• Pricing joint claims on an asset and its realized variance in stochastic volatility models
• Density symmetries for a class of 2-D diffusions with applications to finance
• The stochastic solution to a Cauchy problem for degenerate parabolic equations
• Consistent modelling of VIX and equity derivatives using a \(3/2\) plus jumps model

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