Applications of backward stochastic differential equations to insurance and finance

Łukasz Delong

Collegium of Economic Analysis Annals, 2010, issue 21, 11-26

Abstract: In this paper we deal with backward stochastic differential equations and give examples of their applications to insurance and finance. There are two major fields of applications. The first area concerns pricing and risk measures, the second deals with optimal control problems and optimization. Our aim is to show that backward stochastic differential equations,despite its mathematical complexity, are intuitive and can help in solving real life problems. Keywords- backward stochastic differential equation, Choquet expectation, f-expectation, market consistent valuation, quadratic hedging, unit-linked products.

Date: 2010
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