The stochastic solution to a Cauchy problem for degenerate parabolic equations

DOI10.1016/J.JMAA.2017.02.021zbMATH Open1381.60097arXiv1309.0046OpenAlexW2340848136MaRDI QIDQ517967FDOQ517967

Xiao Shan Chen, Yu-Jui Huang, Chao Zhu, Qingshuo Song

Publication date: 28 March 2017

Published in: Journal of Mathematical Analysis and Applications (Search for Journal in Brave)

Abstract: We study the stochastic solution to a Cauchy problem for a degenerate parabolic equation arising from option pricing. When the diffusion coefficient of the underlying price process is locally H"older continuous with exponent $deltain(0,1]$, the stochastic solution, which represents the price of a European option, is shown to be a classical solution to the Cauchy problem. This improves the standard requirement $deltage1/2$. Uniqueness results, including a Feynman-Kac formula and a comparison theorem, are established without assuming the usual linear growth condition on the diffusion coefficient. When the stochastic solution is not smooth, it is characterized as the limit of an approximating smooth stochastic solutions. In deriving the main results, we discover a new, probabilistic proof of Kotani's criterion for martingality of a one-dimensional diffusion in natural scale.

Full work available at URL: https://arxiv.org/abs/1309.0046

zbMATH Keywords

comparison principleFeynman-Kac formulastochastic solutionslocal martingalesdegenerate Cauchy problemsnecessary and sufficient condition for uniqueness

Mathematics Subject Classification ID

Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Diffusion processes (60J60) Solutions to PDEs in closed form (35C05) Degenerate parabolic equations (35K65) PDEs with randomness, stochastic partial differential equations (35R60) Martingales with continuous parameter (60G44)

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Cited In (10)

• On the Cauchy Problem for Stochastic Stokes Equations
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• Evolution of solution of the Cauchy problem for a stochastic combustion equation with a weak source
• Solvability of the stochastic Degasperis-Procesi equation
• Space-Time Regularity of Solutions of the Parabolic Stochastic Cauchy Problem
• A stochastic solution of a high order parabolic equation
• The Cauchy problem for a stochastic parabolic equation with an argument deviation
• Title not available (Why is that?)
• Determination of the solution of a stochastic parabolic equation by the terminal value
• Title not available (Why is that?)

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