High-order exponential spline method for pricing European options

ABSTRACT

The key purpose of the present work is to constitute an analysis of a numerical method for a degenerate partial differential equation, called the Black–Scholes equation, governing European option pricing. The method is based on exponential spline spatial discretization and an explicit finite-difference time-stepping technique. We establish the convergence and an error bound for the solutions of the fully discretized system. The numerical and graphical results elucidate that the suggested approach is very straightforward and accurate.     

Determination of a source term in a partial differential equation arising in finance

In this article, we discuss the Lipschitz stability for an inverse problem of determining the source term in option pricing. The main tool for establishing the result is the Carleman estimate.     

A collocation approach for the numerical solution of certain linear retarded and advanced integrodifferential equations with linear functional arguments

This article presents a Taylor collocation method for the approximate solution of high‐order linear Volterra‐Fredholm integrodifferential equations with linear functional arguments. This method is essentially based on the truncated Taylor series and its matrix representations with collocation points. Some numerical examples, which consist of initial and boundary conditions, are given to show the properties of the technique. © 2009 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq, 2011     

A note on characterizations of multivariate stable distributions

Several characterizations of multivariate stable distributions together with a characterization of multivariate normal distributions and multivariate stable distributions with Cauchy marginals are given. These are related to some standard characterizations of marcinkiewicz.Research supported, in part, by the Air Force Office of Scientific Research under Contract AFOSR 84-0113. Reproduction in whole or part is permitted for any purpose of the United States Government.     

Numerical solution of modified Black–Scholes equation pricing stock options with discrete dividend

This paper deals with the numerical solution of the modified Black–Scholes equation modelling the valuation of stock options with discrete dividend payments. By using a delta-defining sequence of the involved generalized Dirac delta function and applying the Mellin transform, an integral formula for the solution is obtained. Then, numerical quadrature approximations and illustrative examples are given.     

Fractional stochastic integration and Black–Scholes equation for fractional Brownian model with stochastic volatility

We modify the Hu-Øksendal and Elliot-van der Hoek approach to arbitrage-free financial markets driven by a fractional Brownian motion that is defined on a white noise space. We deduce and solve a Black–Scholes fractional equation for constant volatility and outline the corresponding equation with stochastic volatility. As an auxiliary result, we produce some simple conditions implying the existence of the Wick integral w.r.t. fractional noise.     

A class of multivariate symmetric stable distributions

Multivariate symmetric stable characteristic functions and their properties, as well as conditions for independence and an analogue of the correlation coefficient in bivariate symmetric stable distributions, are discussed.     

Indifference pricing of a life insurance portfolio with risky asset driven by a shot-noise process

In this paper, we investigate the pricing problem for a portfolio of life insurance contracts where the life contingent payments are equity-linked depending on the performance of a risky stock or index. The shot-noise effects are incorporated in the modeling of stock prices, implying that sudden jumps in the stock price are allowed, but their effects may gradually decline over time. The contracts are priced using the principle of equivalent utility. Under the assumption of exponential utility, we find the optimal investment strategy and show that the indifference premium solves a non-linear partial integro-differential equation (PIDE). The Feynman–Kač form solutions are derived for two special cases of the PIDE. We further discuss the problem for the asymptotic shot-noise process, and find the probabilistic representation of the indifference premium. We also provide some numerical examples and analyze parameter sensitivities for the results obtained in this paper.     

三维抛物型方程的一个高精度恒稳定的PC格式

对三维抛物型方程,构造了一个高精度恒稳定的PC格式,格式的截断误差阶达到O（△t^2＋△x^4）,通过数值实例验证了所得格式较现有的同类格式的精度提高了二位以上有效数字;然后将Richardson外推法应用于本文格式,得到了具有O（△t^3＋△x^6）阶精度的近似解,并将所得格式推广到了四维情形．     

Well‐posedness of time‐space fractional stochastic evolution equations driven by α‐stable noise

This paper is devoted to the well‐posedness for time‐space fractional Ginzburg‐Landau equation and time‐space fractional Navier‐Stokes equations by α‐stable noise. The spatial regularity and the temporal regularity of the nonlocal stochastic convolution are firstly established, and then the existence and uniqueness of the global mild solution are obtained by the Banach fixed point theorem and Mittag‐Leffler functions, respectively. Numerical simulations for time‐space fractional Ginzburg‐Landau equation are provided to verify the analysis results.     

The Taylor series method of order p and Adams–Bashforth method on time scales

A recent study on the Taylor series method of second order and the trapezoidal rule for dynamic equations on time scales has been continued by introducing a derivation of the Taylor series method of arbitrary order $p$ on time scales. The error and convergence analysis of the method is also obtained. The 2-step Adams–Bashforth method for dynamic equations on time scales is concluded and applied to examples of initial value problems for nonlinear dynamic equations. Numerical results are presented and discussed.     

A modification of the invariant imbedding method for a singular boundary value problem

We consider a dynamically-consistent analytical model of a 3D topographic vortex. The model is governed by equations derived from the classical problem of the axisymmetric Taylor–Couette flow. Using linear expansions, these equations can be reduced to a differential sixth-order equation with variable coefficients. For this differential equation, we formulate a boundary value problem, which has a number of issues for numerical solving. To avoid these issues and find the eigenvalues and eigenfunctions of the boundary value problem, we suggest a modification of the invariant imbedding method (the Riccati equation method). In this paper, we show that such a modification is necessary since the boundary conditions possess singular matrices, which sufficiently complicate the derivation of the Riccati equation. We suggest algebraic manipulations, which permit the initial problem to be reduced to a problem with regular boundary conditions. Also, we propose a method for obtaining a numerical solution of the matrix Riccati equation by means of recurrence relations, which allow us to obtain a matrizer converging to the required eigenfunction. The suggested method is tested by calculating the corresponding eigenvalues and eigenfunctions, and then, by constructing fluid particle trajectories on the basis of the eigenfunctions.     

Probability Interpretation of the Integral of Fractional Order

We establish a relation between stable distributions in probability theory and the fractional integral. Moreover, it turns out that the parameter of the stable distribution coincides with the exponent of the fractional integral. It follows from an analysis of the obtained results that equations with the fractional time derivative describe the evolution of some physical system whose time degree of freedom becomes stochastic, i.e., presents a sum of random time intervals subject to a stable probability distribution. We discuss relations between the fractal Cantor set (Cantor strips) and the fractional integral. We show that the possibility to use this relation as an approximation of the fractional integral is rather limited.     

Solutions with a bounded support promote permanence of a distributed replicator equation

The now classical replicator equation describes a wide variety of biological phenomena, including those in theoretical genetics, evolutionary game theory, or in the theories of the origin of life. Among other questions, the permanence of the replicator equation is well studied in the local, well-mixed case. Inasmuch as the spatial heterogeneities are key to understanding the species coexistence at least in some cases, it is important to supplement the classical theory of the nondistributed replicator equation with a spatially explicit framework. One possible approach, motivated by the porous medium equation, is introduced. It is shown that the solutions to the spatially heterogeneous replicator equation may evolve to equilibrium states that have a bounded support, and, moreover, that these solutions are of paramount importance for the overall system permanence, which is shown to be a more commonplace phenomenon for the spatially explicit equation if compared with the local model.     

一类具有Taylor阻尼的Klein-Gordon方程解的稳定性分析

研究了一类具有Taylor阻尼的Klein-Gordon方程解的稳定性.通过对松弛函数及初始值进行适当的限制,首先基于位势井理论,得到了整体解的存在性,然后构造新的能量函数,利用凸函数的性质及扰动能量方法,得到了显式的能量衰减估计.研究过程中弱化了对松弛函数的限制,同时得到了更广泛的能量衰减速率估计.     

一类演化方程的一族双参数恒稳差分格式

对一类演化方程δu/δt=aδ^2m 1u/δx^2m 1(a为常数，m为正整数）构造一族含双参数的三层高精度隐式差分格式。当参数α=1/2,β=0时得到一个双层格式。并证明了：该格式对任意非负参数α≥0，β≥0都是绝对稳定的，并且其截断误差阶为0（（Δt)^2 (Δx)^4).数值例子表明：本文所建立的差分格式是有效的，理论分析与实际计算相吻合。     

一类具有局部弱稳定退化解的奇摄动Robin问题

研究一类一般的二阶非线性方程的奇摄动Robin问题的边界层现象.在退化解是局部弱稳定的主要假设下,利用界定函数法和微分不等式理论证明了呈边界层性态的解的存在性,并给出解的渐近估计.     

Unconditionally stable modified methods for the solution of two‐ and three‐dimensional telegraphic equation with Robin boundary conditions

In this article, we discuss modified three level implicit difference methods of order two in time and four in space for the numerical solution of two‐ and three‐dimensional telegraphic equation with Robin boundary conditions. Ghost points are introduced to obtain fourth‐order approximations for boundary conditions. Matrix stability analysis is carried out to prove stability of the method for telegraphic equations in two and three dimensions with Neumann boundary conditions. Numerical experiments are carried out and the results are found to be better when compared with the results obtained by other existing methods.