Existence of maximal solutions for the financial stochastic Stefan problem of a volatile asset with spread
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Publication:6427009
arXiv2302.09841MaRDI QIDQ6427009FDOQ6427009
Authors: D. C. Antonopoulou, Dimitris Farazakis, Georgia Karali 
Publication date: 20 February 2023
Abstract: In this work, we consider the outer Stefan problem for the short-time prediction of the spread of a volatile asset traded in a financial market. The stochastic equation for the evolution of the density of sell and buy orders is the Heat Equation with a non-smooth noise in the sense of Walsh, posed in a moving boundary domain with velocity given by the Stefan condition. This condition determines the dynamics of the spread, and the solid phase defines the bid-ask spread area wherein the transactions vanish. We introduce a reflection measure and prove existence and uniqueness of maximal solutions up to stopping times in which the spread stays a.s. non-negative and bounded. For this, we use a Picard approximation scheme and some of the estimates of cite{BH} for the Green's function and the associated to the reflection measure obstacle problem. Analogous results are obtained for the equation without reflection corresponding to a signed density. Additionally, we apply some formal asymptotics when the noise depends only on time to derive that the spread is given by the integral of the solution of a linear diffusion stochastic equation.
Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Second-order parabolic systems (35K40) Nonlinear parabolic equations (35K55) Applications of stochastic analysis (to PDEs, etc.) (60H30) Stochastic models in economics (91B70) Financial applications of other theories (91G80)
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