High-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids

We derive high-order compact finite difference schemes for option pricing in stochastic volatility models on non-uniform grids. The schemes are fourth-order accurate in space and second-order accurate in time for vanishing correlation. In our numerical study we obtain high-order numerical convergence also for non-zero correlation and non-smooth payoffs which are typical in option pricing. In all numerical experiments a comparative standard second-order discretisation is significantly outperformed. We conduct a numerical stability study which indicates unconditional stability of the scheme

Asset Pricing Under Information with Stochastic Volatility

Based on a general specification of the asset specific pricing kernel, we develop a pricing model using an information process with stochastic volatility. We derive analytical asset and option pricing formulas. The asset prices in this rational expectations model exhibit crash-like, strong downward movements. The resulting option pricing formula is consistent with the strong negative skewness and high levels of kurtosis observed in empirical studies. Furthermore, we determine credit spreads in a simple structural model.

An exact result in strong wave turbulence of thin elastic plates

An exact result concerning the energy transfers between non-linear waves of thin elastic plate is derived. Following Kolmogorov's original ideas in hydrodynamical turbulence, but applied to the F\"oppl-von K\'arm\'an equation for thin plates, the corresponding K\'arm\'an-Howarth-Monin relation and an equivalent of the $\frac{4}{5}$-Kolmogorov's law is derived. A third-order structure function involving increments of the amplitude, velocity and the Airy stress function of a plate, is proven to be equal to $-\varepsilon\, \ell$, where $\ell$ is a length scale in the inertial range at which the increments are evaluated and $\varepsilon$ the energy dissipation rate. Numerical data confirm this law. In addition, a useful definition of the energy fluxes in Fourier space is introduced and proven numerically to be flat in the inertial range. The exact results derived in this Letter are valid for both, weak and strong wave-turbulence. They could be used as a theoretical benchmark of new wave-turbulence theories and to develop further analogies with hydrodynamical turbulence

High-order compact schemes for parabolic problems with mixed derivatives in multiple space dimensions

We present a high-order compact finite difference approach for a rather general class of parabolic partial differential equations with time and space dependent coefficients as well as with mixed second-order derivative terms in n spatial dimensions. Problems of this type arise frequently in computational fluid dynamics and computational finance. We derive general conditions on the coefficients which allow us to obtain a high-order compact scheme which is fourth-order accurate in space and second-order accurate in time. Moreover, we perform a thorough von Neumann stability analysis of the Cauchy problem in two and three spatial dimensions for vanishing mixed derivative terms, and also give partial results for the general case. The results suggest unconditional stability of the scheme. As an application example we consider the pricing of European Power Put Options in the multidimensional Black-Scholes model for two and three underlying assets. Due to the low regularity of typical initial conditions we employ the smoothing operators of Kreiss et al. to ensure high-order convergence of the approximations of the smoothed problem to the true solution

A Quasilinear Parabolic Equation with Quadratic Growth of the Gradient modeling Incomplete Financial Markets

We consider a quasilinear parabolic equation with quadratic gradient terms. It arises in the modelling of an optimal portfolio which maximizes the expected utility from terminal wealth in incomplete markets consisting of risky assets and non-tradable state variables. The existence of solutions is shown by extending the monotonicity method of Frehse. Furthermore, we prove the uniqueness of weak solutions under a smallness condition on the derivatives of the covariance matrices with respect to the solution. The influence of the non-tradable state variables on the optimal value function is illustrated by a numerical example.Quasilinear PDE, quadratic gradient, existence and uniqueness of solutions, optimal portfolio, incomplete market

International and Domestic Trading and Wealth Distribution

We introduce and discuss a kinetic model for wealth distribution in a simple market economy which is built of a number of countries or social groups. Our approach is based on the model with risky investments introduced by Cordier, Pareschi and one of the authors in [13] and borrows ideas from the kinetic theory of mixtures of rarefied gases. Wealth is exchanged by individuals inside these countries (domestic trade) as well as in between different countries (international trade). Under a suitable scaling we derive a system of Fokker-Planck type equations and discuss its extension to a two-dimensional model with distributed trading propensity. Theoretical and numerical results for two groups show that the wealth distribution develops a bimodal (and in general, a polymodal) shape.

Hydrodynamics from kinetic models of conservative economies

In this paper, we introduce and discuss the passage to hy- drodynamic equations for kinetic models of conservative economies, in which the density of wealth depends on additional parameters, like the propensity to invest. As in kinetic theory of rarefied gases, the closure depends on the knowledge of the homogeneous steady wealth distribution (the Maxwellian) of the underlying kinetic model. The collision operator used here is the Fokker-Planck operator introduced by J.P. Bouchaud and M. Mezard in [4], which has been recently obtained in a suitable asymp- totic of a Boltzmann-like model involving both exchanges between agents and speculative trading by S. Cordier, L. Pareschi and one of the authors [11]. Numerical simulations on the fluid equations are then proposed and analyzed for various laws of variation of the propensity.Wealth and income distributions, Boltzmann equation, hy- drodynamics, Euler equations