Second-order stochastic target problems with generalized market impact

DOI10.1137/18M1196078MaRDI QIDQ5205387zbMATHWikidataFDO

Authors Bruno Bouchard, Grégoire Loeper, Chao Zhou, H. Mete Soner

Publication date 11 December 2019

Published in SIAM Journal on Control and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1806.08533

zbMATH Keywords

asymptotic expansionfully nonlinear parabolic equationgeneralized market impactsecond-order stochastic target

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Asymptotic approximations, asymptotic expansions (steepest descent, etc.) (41A60) PDEs in connection with biology, chemistry and other natural sciences (35Q92) Optimal stochastic control (93E20)

Abstract: We extend the study of [7, 18] to stochastic target problems with general market impacts. Namely, we consider a general abstract model which can be associated to a fully nonlinear parabolic equation. Unlike [7, 18], the equation is not concave and the regularization/verification approach of [7] can not be applied. We also relax the gamma constraint of [7]. In place, we need to generalize the a priori estimates of [18] and exhibit smooth solutions from the classical parabolic equations theory. Up to an additional approximating argument, this allows us to show that the super-hedging price solves the parabolic equation and that a perfect hedging strategy can be constructed when the coefficients are smooth enough. This representation leads to a general dual formulation. We finally provide an asymptotic expansion around a model without impact.

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Cited in

(5)

• Dual formulation of second order target problems
• Interior second derivatives estimates for nonlinear diffusions
• Hedging of covered options with linear market impact and gamma constraint
• Understanding the dual formulation for the hedging of path-dependent options with price impact
• Kyle-back models with risk aversion and non-Gaussian beliefs

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