An approximation scheme for semilinear parabolic PDEs with convex and coercive Hamiltonians
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Publication:5208749
Feynman-Kac formulaviscosity solutionssplittingHopf-Lax formulaoptimal switching approximationshaking coefficients technique
Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Portfolio theory (91G10) Degenerate parabolic equations (35K65) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Stability and convergence of numerical methods for initial value and initial-boundary value problems involving PDEs (65M12) Optimal stochastic control (93E20)
Abstract: We propose an approximation scheme for a class of semilinear parabolic equations that are convex and coercive in their gradients. Such equations arise often in pricing and portfolio management in incomplete markets and, more broadly, are directly connected to the representation of solutions to backward stochastic differential equations. The proposed scheme is based on splitting the equation in two parts, the first corresponding to a linear parabolic equation and the second to a Hamilton-Jacobi equation. The solutions of these two equations are approximated using, respectively, the Feynman-Kac and the Hopf-Lax formulae. We establish the convergence of the scheme and determine the convergence rate, combining Krylov's shaking coefficients technique and Barles-Jakobsen's optimal switching approximation.
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