Weak reflection principle for Lévy processes

DOI10.1214/14-AAP1073zbMATH Open1330.60064arXiv1308.2250OpenAlexW3125338479MaRDI QIDQ894806FDOQ894806

Authors: Erhan Bayraktar, Sergey Nadtochiy 

Publication date: 24 November 2015

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: In this paper, we develop a new mathematical technique which allows us to express the joint distribution of a Markov process and its running maximum (or minimum) through the marginal distribution of the process itself. This technique is an extension of the classical reflection principle for Brownian motion, and it is obtained by weakening the assumptions of symmetry required for the classical reflection principle to work. We call this method a weak reflection principle and show that it provides solutions to many problems for which the classical reflection principle is typically used. In addition, unlike the classical reflection principle, the new method works for a much larger class of stochastic processes which, in particular, do not possess any strong symmetries. Here, we review the existing results which establish the weak reflection principle for a large class of time-homogeneous diffusions on a real line and then proceed to extend this method to the L'{e}vy processes with one-sided jumps (subject to some admissibility conditions). Finally, we demonstrate the applications of the weak reflection principle in financial mathematics, computational methods and inverse problems.

Full work available at URL: https://arxiv.org/abs/1308.2250

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zbMATH Keywords

inverse problemsstatic hedgingbarrier optionsweak reflection principletime-homogeneous diffusionsLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Diffusion processes (60J60) Inverse problems for integral equations (45Q05) Financial applications of other theories (91G80)

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Cited In (4)

• Reflection principle for finite-velocity random motions
• Carr-Nadtochiy's weak reflection principle for Markov chains on \(\mathbb{Z}^d\)
• ROBUST TRADING OF IMPLIED SKEW
• Optimal placement in a limit order book: an analytical approach

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