Efficient numerical Fourier methods for coupled forward-backward SDEs
characteristic functioncoupled forward-backward stochastic differential equationscross-hedgingfinanceFourier-cosine expansion methodnumerical experimentRichardson extrapolationsecond-order convergence
Ordinary differential equations and systems with randomness (34F05) Characteristic functions; other transforms (60E10) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to stochastic differential and integral equations (65C30) Stability and convergence of numerical methods for ordinary differential equations (65L20) Numerical methods for discrete and fast Fourier transforms (65T50) Numerical methods (including Monte Carlo methods) (91G60)
Three numerical schemes, respectively named explicit, local and global, are derived for solving coupled forward-backward stochastic differential equations. Results of numerical experiments are presented for four examples and indicate that the explicit method is preferable while the global method is the least effective. First -rder convergence is obtained; and it is shown that Richardson extrapolation can be used to get second-order convergence. The last example deals with finance and involves the hedging of an option with a correlated asset.
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