Valuation equations for stochastic volatility models

DOI10.1137/110842302MaRDI QIDQ4902218zbMATH OpenOpenAlexFDO

Authors Erhan Bayraktar, Constantinos Kardaras, Hao Xing

Publication date 25 January 2013

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

Full work available at URL https://arxiv.org/abs/1004.3299, http://eprints.lse.ac.uk/43460/

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)

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.

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Cited in

(22)

• Consistent modelling of VIX and equity derivatives using a \(3/2\) plus jumps model
• Stochastic representation of solutions to degenerate elliptic and parabolic boundary value and obstacle problems with Dirichlet boundary conditions
• Duality in optimal consumption-investment problems with alternative data
• A valuation model for firms with stochastic earnings
• A More General Valuation and Arbitrage Theory for Itô Processes
• Diffusion transformations, Black-Scholes equation and optimal stopping
• On the martingale problem for degenerate-parabolic partial differential operators with unbounded coefficients and a mimicking theorem for Itô processes
• 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
• Singular risk-neutral valuation equations
• Large deviation principle for Volterra type fractional stochastic volatility models
• 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
• The stochastic solution to a Cauchy problem for degenerate parabolic equations
• Density symmetries for a class of 2-D diffusions with applications to finance

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