We show that the convergence rate of asymptotic expansions for solutions of SDEs is higher in the case of degenerate diffusion compared to the elliptic case, i.e. it is higher when the Brownian motion directly acts only along some directions. In the scalar case, this phenomenon was already observed in Gobet and Miri 2014 using Malliavin calculus techniques. Here, we provide a general and detailed analysis by employing the recent study of intrinsic functional spaces related to hypoelliptic Kolmogorov operators in Pagliarani et al. 2016. Applications to finance are discussed, in the study of path-dependent derivatives (e.g. Asian options) and in models incorporating dependence on past information.
Pagliarani, S., Pascucci, A., Pignotti, M. (2017). Intrinsic expansions for averaged diffusion processes. STOCHASTIC PROCESSES AND THEIR APPLICATIONS, 127(8), 2560-2585 [10.1016/j.spa.2016.12.002].
Intrinsic expansions for averaged diffusion processes
Pagliarani, S;PASCUCCI, ANDREA;PIGNOTTI, MICHELE
2017
Abstract
We show that the convergence rate of asymptotic expansions for solutions of SDEs is higher in the case of degenerate diffusion compared to the elliptic case, i.e. it is higher when the Brownian motion directly acts only along some directions. In the scalar case, this phenomenon was already observed in Gobet and Miri 2014 using Malliavin calculus techniques. Here, we provide a general and detailed analysis by employing the recent study of intrinsic functional spaces related to hypoelliptic Kolmogorov operators in Pagliarani et al. 2016. Applications to finance are discussed, in the study of path-dependent derivatives (e.g. Asian options) and in models incorporating dependence on past information.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
