A constructive method for convex solutions of a class of nonlinear Black-Scholes equations

Abstract

In this work, we are concerned with the theoretical study of a nonlinear Black-Scholes equation resulting from market frictions. We will focus our attention on Barles and Soner’s model where the volatility is enlarged due to the presence of transaction costs. The aim of this paper is to give a constructive mathematical approach for proving the existence of convex solutions to a non degenerate fully nonlinear deterministic problem with nonlinear dependence upon the highest derivative. The existence of a strong solution to the original equation is shown by considering a monotone sequence satisfying an abstract Barenblatt equation and converging toward the solution of a limit problem.

Keywords

• fully nonlinear pde
• black-scholes equations
• barenblatt equation
• primary 35k65
• secondary 35k55