Valuation and hedging strategy of currency options under regime-switching jump-diffusion model

The main purpose of this thesis is in analyzing and empirically simulating risk minimizing European foreign exchange option pricing and hedging strategy when the spot foreign exchange rate is governed by a Markov-modulated jump-diffusion model. The domestic and foreign money market interest rates, the drift and the volatility of the exchange rate dynamics all depend on a continuous-time hidden Markov chain which can be interpreted as the states of a macro-economy. In this paper, we will provide a practical lognormal diffusion dynamic of the spot foreign exchange rate for market practitioners. We employing the minimal martingale measure to demonstrate a system of coupled partial-differential-integral equations satisfied by the currency option price and attain the corresponding hedging schemes and the residual risk. Numerical simulations of the double exponential jump diffusion regime-switching model are used to illustrate the different effects of the various parameters on currency option prices.     

Correspondence between frame shrinkage and high-order nonlinear diffusion

Nonlinear diffusion filtering and wavelet/frame shrinkage are two popular methods for signal and image denoising. The relationship between these two methods has been studied recently. In this paper we investigate the correspondence between frame shrinkage and nonlinear diffusion.We show that the frame shrinkage of Ron-Shen?s continuous-linear-spline-based tight frame is associated with a fourth-order nonlinear diffusion equation. We derive high-order nonlinear diffusion equations associated with general tight frame shrinkages. These high-order nonlinear diffusion equations are different from the high-order diffusion equations studied in the literature. We also construct two sets of tight frame filter banks which result in the sixth- and eighth-order nonlinear diffusion equations.The correspondence between frame shrinkage and diffusion filtering is useful to design diffusion-inspired shrinkage functions with competitive performance. On the other hand, the study of such a correspondence leads to a new type of diffusion equations and helps to design frame-inspired diffusivity functions. The denoising results with diffusion-inspired shrinkages provided in this paper are promising.     

Long-term coexistence for a competitive system of spatially varying gradient reaction–diffusion equations

Spatial distribution of interacting chemical or biological species is usually described by a system of reaction–diffusion equations. In this work we consider a system of two reaction–diffusion equations with spatially varying diffusion coefficients which are different for different species and with forcing terms which are the gradient of a spatially varying potential. Such a system describes two competing biological species. We are interested in the possibility of long-term coexistence of the species in a bounded domain. Such long-term coexistence may be associated either with a periodic in time solution (usually associated with a Hopf bifurcation), or with time-independent solutions. We prove that no periodic solution exists for the system. We also consider some steady states (the time-independent solutions) and examine their stability and bifurcations.     

Traveling waves for delayed non-local diffusion equations with crossing-monostability

This paper is concerned with the traveling waves for a class of delayed non-local diffusion equations with crossing-monostability. Based on constructing two associated auxiliary delayed non-local diffusion equations with quasi-monotonicity and a profile set in a suitable Banach space using the traveling wave fronts of the auxiliary equations, the existence of traveling waves is proved by Schauder’s fixed point theorem. The result implies that the traveling waves of the delayed non-local diffusion equations with crossing-monostability are persistent for all values of the delay τ?0.     

On the construction of non-affine jump-diffusion models

We describe a method for construction of jump analogues of certain one-dimensional diffusion processes satisfying solvable stochastic differential equations. The method is based on the reduction of the original stochastic differential equations to the ones with linear diffusion coefficients, which are reducible to the associated ordinary differential equations, by using the appropriate integrating factor processes. The analogues are constructed by means of adding the jump components linearly into the reduced stochastic differential equations. We illustrate the method by constructing jump analogues of several diffusion processes and expand the notion of market price of risk to the resulting non-affine jump-diffusion models.     

Optimal Control for Fractional Diffusion Equations with Incomplete Data

We are concerned with the optimal control of time-fractional diffusion equations with missing boundary condition. Using the notion of no-regret control and least (or low) regret control developed by Lions, we first prove that the least regret control problem associated with the boundary fractional diffusion equation has a unique solution. Then we show that this solution converges to the no-regret control which we characterize by a singular optimality system.     

DIFFUSION AND BIFURCATION PROBLEMS IN SINGULARLY PERTURBED DOMAINS

ABSTRACT. Diffusion problems under singular perturbations of the domain or the boundary conditions are analyzed. The first problem that we consider is the diffusion of a material from a domain that is nearly impermeable, having only several small patches on the boundary where the material can slowly leak out. The second problem that is studied is the diffusion of a material that originates from some localized regions in a two or three‐dimensional domain. Steady‐state solutions and the long‐time behavior of solutions are analyzed in detail. Finally, the analysis is extended to determine the change in bifurcation values associated with nonlinear diffusion equations under singular perturbations of the domain. The results are then applied to a model in resource management.     

Time Delay-Induced Instabilities and Hopf Bifurcations in General Reaction–Diffusion Systems

The distribution of the roots of a second order transcendental polynomial is analyzed, and it is used for solving the purely imaginary eigenvalue of a transcendental characteristic equation with two transcendental terms. The results are applied to the stability and associated Hopf bifurcation of a constant equilibrium of a general reaction–diffusion system or a system of ordinary differential equations with delay effects. Examples from biochemical reaction and predator–prey models are analyzed using the new techniques.     

Shadow systems and attractors in reaction-diffusion equations

For a pair of reaction diffusion equations with one diffusion coefficient very large, there is associated a reaction diffusion equation coupled with an ordinary differential equation (the shadow system) with nonlocal effects which has the property that it contains all of the essential dynamics of the original equations. Key words: Attractors, shadow systems, reaction-diffusion equations     

Time-space integrable decompositions of nonlinear evolution equations

Separation of the time and space variables of evolution equations is analyzed, without using any structure associated with evolution equations. The resulting theory provides techniques for constructing time-space integrable decompositions of evolution equations, which transform an evolution equation into two compatible Liouville integrable ordinary differential equations in the time and space variables. The techniques are applied to the KdV, MKdV and diffusion equations, thereby yielding several new time-space integrable decompositions of these equations.     

Attractors for random dynamical systems

Summary A criterion for existence of global random attractors for RDS is established. Existence of invariant Markov measures supported by the random attractor is proved. For SPDE this yields invariant measures for the associated Markov semigroup. The results are applied to reation diffusion equations with additive white noise and to Navier-Stokes equations with multiplicative and with additive white noise.     

On numerical methods and error estimates for degenerate fractional convection–diffusion equations

First we introduce and analyze a convergent numerical method for a large class of nonlinear nonlocal possibly degenerate convection diffusion equations. Secondly we develop a new Kuznetsov type theory and obtain general and possibly optimal error estimates for our numerical methods—even when the principal derivatives have any fractional order between 1 and 2! The class of equations we consider includes equations with nonlinear and possibly degenerate fractional or general Levy diffusion. Special cases are conservation laws, fractional conservation laws, certain fractional porous medium equations, and new strongly degenerate equations.     

Oscillatory waves in reaction–diffusion equations with nonlocal delay and crossing-monostability

This paper is concerned with the existence of oscillatory waves in reaction–diffusion equations with nonlocal delay and crossing-monostability, which include many population models, and two main results are presented. In the first one, we establish the existence of non-monotone traveling waves from the trivial solution to the positive equilibrium. The approach is based on the construction of two associated auxiliary reaction–diffusion equations with quasi-monotonicity and a profile set in a suitable Banach space by using traveling fronts of the auxiliary equations. In the second one, we obtain the existence of periodic waves around the positive equilibrium by using Hopf bifurcation theorem.     

Detailed analysis of a conservative difference approximation for the time fractional diffusion equation

Diffusion equations that use time fractional derivatives are attractive because they describe a wealth of problems involving non-Markovian Random walks. The time fractional diffusion equation (TFDE) is obtained from the standard diffusion equation by replacing the first-order time derivative with a fractional derivative of order α? (0,1). Developing numerical methods for solving fractional partial differential equations is a new research field and the theoretical analysis of the numerical methods associated with them is not fully developed. In this paper an explicit conservative difference approximation (ECDA) for TFDE is proposed. We give a detailed analysis for this ECDA and generate discrete models of random walk suitable for simulating random variables whose spatial probability density evolves in time according to this fractional diffusion equation. The stability and convergence of the ECDA for TFDE in a bounded domain are discussed. Finally, some numerical examples are presented to show the application of the present technique.     

Nonclassical symmetry reductions for an inhomogeneous nonlinear diffusion equation

In this paper we consider a class of generalised diffusion equations which are of great interest in mathematical physics. For some of these equations model, fast diffusion nonclassical symmetries are derived. We find the connection between classes of nonclassical symmetries of the equation and of an associated system. These symmetries allow us to increase the number of solutions. Some of these solutions are unobtainable by classical symmetries and exhibit an interesting behaviour.     

Some asymptotic limits of reaction–diffusion systems appearing in reversible chemistry

This paper concerns reaction–diffusion systems consisting of three or four equations, which come out of reversible chemistry. We introduce different scalings for those systems, which make sense in various situations (species with very different concentrations or very different diffusion rates, chemical reactions with very different rates, etc.). We show how recently introduced mathematical tools allow to prove that the formal asymptotics associated to those scalings indeed hold at the rigorous level.     

FRACTIONAL DIFFUSION EQUATIONS WITH INTERNAL DEGREES OF FREEDOM

We present a generalization of the linear one-dimensional diffusion equation by com-bining the fractional derivatives and the internal degrees of freedom. The solutions areconstructed from those of the scalar fractional diffusion equation. We analyze the in-terpolation between the standard diffusion and wave equations defined by the fractionalderivatives. Our main result is that we can define a diffusion process depending on theinternal degrees of freedom associated to the system.     

Domain decomposition methods for a class of spatially heterogeneous delayed reaction–diffusion equations

We derive and study a class of delayed reaction–diffusion equations with spatial heterogeneity, which models the population of a single species with different habitats for mature and immature individuals. We introduce new solid cones, obtain spectral bounds of several spatial heterogeneous operators, and establish limiting non-negativeness property for the whole space and the eventual comparison principle for bounded domains. As a result, we develop new domain decomposition methods so that one can compare solutions with those to associated equations from a suitable bounded spatial domain to the whole space. Then by employing domain decomposition methods and dynamical system approaches, we obtain threshold results under the supremum norm. These results are greatly different from the existing ones of other evolution equations in unbounded domains or the whole space. The main results are applied to two examples with the Ricker birth function and with the Mackey–Glass birth function. It reveals that the size of the immature habitat can affect the reproduction and spread of the population.     

Traveling Waves in Degenerate Diffusion Equations

In this survey, we present a literature review on the study of traveling waves in degenerate diffusion equations by illustrating the interesting and singular wave behavior caused by degeneracy. The main results on wave existence and stability are presented for the typical degenerate equations, including porous medium equations, flux limited diffusion equations, delayed degenerate diffusion equations, and other strong degenerate diffusion equations.     

Reciprocal diffusions and stochastic differential equations of second order ∗

We develop a theory of second order diffusion processes and associated stochastic differential equations of second order. We show that equations of evolution of the density, mean velocity and momentum flux are a family of first order conservation laws similar to those of continuum mechanics. We verify that the theory is satisfied for a large class of reciprocal Gaussian processes