Second-order stochastic target problems with generalized market impact

DOI10.1137/18M1196078zbMATH Open1430.91106arXiv1806.08533WikidataQ126528720 ScholiaQ126528720MaRDI QIDQ5205387FDOQ5205387

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)

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.

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

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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)

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Cited In (4)

• Kyle-back models with risk aversion and non-Gaussian beliefs
• Interior second derivatives estimates for nonlinear diffusions
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• Dual formulation of second order target problems

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