On solutions of a partial integro-differential equation in Bessel potential spaces with applications in option pricing models
In this paper we focus on qualitative properties of solutions to a nonlocal nonlinear partial integro-differential equation (PIDE). Using the theory of abstract semilinear parabolic equations we prove existence and uniqueness of a solution in the scale of Bessel potential spaces. Our aim is to gener...
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Published in | Japan journal of industrial and applied mathematics Vol. 37; no. 3; pp. 697 - 721 |
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Main Authors | , |
Format | Journal Article |
Language | English |
Published |
Tokyo
Springer Japan
01.09.2020
Springer Nature B.V |
Subjects | |
Online Access | Get full text |
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Summary: | In this paper we focus on qualitative properties of solutions to a nonlocal nonlinear partial integro-differential equation (PIDE). Using the theory of abstract semilinear parabolic equations we prove existence and uniqueness of a solution in the scale of Bessel potential spaces. Our aim is to generalize known existence results for a wide class of Lévy measures including with a strong singular kernel. As an application we consider a class of PIDEs arising in the financial mathematics. The classical linear Black–Scholes model relies on several restrictive assumptions such as liquidity and completeness of the market. Relaxing the complete market hypothesis and assuming a Lévy stochastic process dynamics for the underlying stock price process we obtain a model for pricing options by means of a PIDE. We investigate a model for pricing call and put options on underlying assets following a Lévy stochastic process with jumps. We prove existence and uniqueness of solutions to the penalized PIDE representing approximation of the linear complementarity problem arising in pricing American style of options under Lévy stochastic processes. We also present numerical results and comparison of option prices for various Lévy stochastic processes modelling underlying asset dynamics. |
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ISSN: | 0916-7005 1868-937X |
DOI: | 10.1007/s13160-020-00414-2 |