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Generalized Feynman–Kac formula under volatility uncertainty

Author

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  • Akhtari, Bahar
  • Biagini, Francesca
  • Mazzon, Andrea
  • Oberpriller, Katharina

Abstract

In this paper we provide a generalization of a Feynmac–Kac formula under volatility uncertainty in presence of a linear term in the PDE due to discounting. We state our result under different hypothesis with respect to the derivation given by Hu et al. (2014), where the Lipschitz continuity of some functionals is assumed which is not necessarily satisfied in our setting. In particular, we show that the G-conditional expectation of a discounted payoff is a viscosity solution of a nonlinear PDE. In applications, this permits to calculate such a sublinear expectation in a computationally efficient way.

Suggested Citation

  • Akhtari, Bahar & Biagini, Francesca & Mazzon, Andrea & Oberpriller, Katharina, 2023. "Generalized Feynman–Kac formula under volatility uncertainty," Stochastic Processes and their Applications, Elsevier, vol. 166(C).
    • Handle: RePEc:eee:spapps:v:166:y:2023:i:c:s0304414922002605
    DOI: 10.1016/j.spa.2022.12.003
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    References listed on IDEAS

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    1. Tolulope Fadina & Ariel Neufeld & Thorsten Schmidt, 2018. "Affine processes under parameter uncertainty," Papers 1806.02912, arXiv.org, revised Mar 2019.
    2. Soner, H. Mete & Touzi, Nizar & Zhang, Jianfeng, 2011. "Martingale representation theorem for the G-expectation," Stochastic Processes and their Applications, Elsevier, vol. 121(2), pages 265-287, February.
    3. Hu, Mingshang & Ji, Shaolin & Peng, Shige & Song, Yongsheng, 2014. "Comparison theorem, Feynman–Kac formula and Girsanov transformation for BSDEs driven by G-Brownian motion," Stochastic Processes and their Applications, Elsevier, vol. 124(2), pages 1170-1195.
    4. Liu, Guomin, 2020. "Exit times for semimartingales under nonlinear expectation," Stochastic Processes and their Applications, Elsevier, vol. 130(12), pages 7338-7362.
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