Numerical Ross Recovery for Diffusion Processes Using a PDE Approach

Lina von Sydow and Johan Walden

Applied Mathematical Finance, 2020, vol. 27, issue 1-2, 46-66

Abstract: We develop and analyse a numerical method for solving the Ross recovery problem for a diffusion problem with unbounded support, with a transition independent pricing kernel. Asset prices are assumed to only be available on a bounded subinterval $$B = [- N,N]$$B=[−N,N]. Theoretical error bounds on the recovered pricing kernel are derived, relating the convergence rate as a function of $$N$$N to the rate of mean reversion of the diffusion process. Our suggested numerical method for finding the pricing kernel employs finite differences, and we apply Sturm–Liouville theory to make use of inverse iteration on the resulting discretized eigenvalue problem. We numerically verify the derived error bounds on a test bench of three model problems.

Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1350486X.2020.1730202 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:27:y:2020:i:1-2:p:46-66

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/1350486X.2020.1730202

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().