The Obstacle Version of the Geometric Dynamic Programming Principle: Application to the Pricing of American Options Under Constraints

The Obstacle Version of the Geometric Dynamic Programming Principle: Application to the Pricing... We provide an obstacle version of the Geometric Dynamic Programming Principle of Soner and Touzi (J. Eur. Math. Soc. 4:201–236, 2002 ) for stochastic target problems. This opens the doors to a wide range of applications, particularly in risk control in finance and insurance, in which a controlled stochastic process has to be maintained in a given set on a time interval (0, T ). As an example of application, we show how it can be used to provide a viscosity characterization of the super-hedging cost of American options under portfolio constraints, without appealing to the standard dual formulation from mathematical finance. In particular, we allow for a degenerate volatility, a case which does not seem to have been studied so far in this context. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematics and Optimization Springer Journals

The Obstacle Version of the Geometric Dynamic Programming Principle: Application to the Pricing of American Options Under Constraints

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Publisher
Springer-Verlag
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Mathematics; Numerical and Computational Physics; Mathematical Methods in Physics; Theoretical, Mathematical and Computational Physics; Systems Theory, Control; Calculus of Variations and Optimal Control; Optimization
ISSN
0095-4616
eISSN
1432-0606
D.O.I.
10.1007/s00245-009-9084-y
Publisher site
See Article on Publisher Site

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