Publication:
Valuation of boundary-linked assets by stochastic boundary value problems solved with a wavelet-collocation algorithm

Thumbnail Image
Identifiers
URI: http://hdl.handle.net/10016/7312
ISSN: 0898-1221
DOI: 10.1016/j.camwa.2006.08.010
Files
boundary_CMA_2006_ps.pdf (1.27 MB)
Publication date
2006-07
Defense date
Authors
Advisors
Tutors
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Impact
Google Scholar
Export
Research Projects
Organizational Units
Journal Issue
Abstract
This article studies the valuation of boundary-linked assets and their derivatives in continuous-time markets. Valuing boundary-linked assets requires the solution of a stochastic differential equation with boundary conditions, which, often, is not Markovian. We propose a waveletcollocation algorithm for solving a Milstein approximation to the stochastic boundary problem. Its convergence properties are studied. Furthermore, we value boundary-linked derivatives using Malliavin calculus and Monte Carlo methods. We apply these ideas to value European call options of boundary-linked assets.
Description
Keywords
Stochastic boundary value problems, Financial derivatives, Wavelets, Collocation methods
Bibliographic citation
Computers and Mathematics with Applications, July 2006, v. 52, n. 1-2, pp. 137-160
Collections
DEE - Artículos de Revistas
Economists Online