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C^{1,1} regularity for degenerate-elliptic obstacle problems in mathematical finance

  • Paul Feehan (MPI MiS, Leipzig + Rutgers University)
A3 01 (Sophus-Lie room)

Abstract

The Heston stochastic volatility process is a degenerate diffusion process where the degeneracy in the diffusion coefficient is proportional to the square root of the distance to the boundary of the half-plane. The generator of this process with killing, called the elliptic Heston operator, is a second-order, degenerate-elliptic partial differential operator, where the degeneracy in the operator symbol is proportional to the distance to the boundary of the half-plane. In mathematical finance, solutions to obstacle problem for the elliptic Heston operator correspond to value functions for perpetual American-style options on the underlying asset. With the aid of weighted Sobolev spaces and weighted Hölder spaces, we establish the optimal C^{1,1} regularity (up to the boundary of the half-plane) for solutions to obstacle problems for the elliptic Heston operator when the obstacle functions are sufficiently smooth. This is joint work with Panagiota Daskalopoulos. While regularity theory for obstacle problems can be a technical area, our aim is to give a presentation which is accessible to PhD students.

Preprint: arxiv.org/abs/1206.0831

Anne Dornfeld

MPI for Mathematics in the Sciences Contact via Mail

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