Study of the risk-adjusted pricing methodology model with methods of geometrical analysis

DOI10.1080/17442508.2010.489642MaRDI QIDQ3108366zbMATH OpenOpenAlexFDO

Authors Ljudmila A. Bordag

Publication date 3 January 2012

Published in Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0911.0113, http://urn.kb.se/resolve?urn=urn:nbn:se:hh:diva-5535

zbMATH Keywords

Black-Scholes equationsexact solutionsinvariant reductionsLie group analysissingular perturbationtransaction costs

Mathematics Subject Classification ID

Lie algebras of Lie groups (22E60) Symmetries, invariants, etc. in context of PDEs (35B06) Singular perturbations in context of PDEs (35B25) Nonlinear parabolic equations (35K55) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91)

Abstract: Families of exact solutions are found to a nonlinear modification of the Black-Scholes equation. This risk-adjusted pricing methodology model (RAPM) incorporates both transaction costs and the risk from a volatile portfolio. Using the Lie group analysis we obtain the Lie algebra admitted by the RAPM equation. It gives us the possibility to describe an optimal system of subalgebras and correspondingly the set of invariant solutions to the model. In this way we can describe the complete set of possible reductions of the nonlinear RAPM model. Reductions are given in the form of different second order ordinary differential equations. In all cases we provide solutions to these equations in an exact or parametric form. We discuss the properties of these reductions and the corresponding invariant solutions.

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Cites work

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Cited in

(9)

• Pricing perpetual put options by the Black-Scholes equation with a nonlinear volatility function
• Group classification for a class of non-linear models of the RAPM type
• The optimal rehedging interval for the options portfolio within the RAPM, taking into account transaction costs and liquidity costs
• Nonlinear Parabolic Equations Arising in Mathematical Finance
• Optimal system, symmetry reductions and new closed form solutions for the geometric average Asian options
• scientific article; zbMATH DE number 7405331 (Why is no real title available?)
• Invariant solutions of the Guéant-Pu model of options pricing and hedging
• Models of self-financing hedging strategies in illiquid markets: symmetry reductions and exact solutions
• Qualitative dynamics and exact traveling-wave solutions of the nonlinear Black-Scholes equation

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