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Global existence, regularity and a probabilistic scheme for a class of ultraparabolic Cauchy problems

Christian Fries () and Joerg Kampen

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Abstract: In this paper we establish a constructive method in order to show global existence and regularity for a class of degenerate parabolic Cauchy problems which satisfy a weak Hoermander condition on a subset of the domain where the data are measurable and which have regular data on the complementary set of the domain. This result has practical incentives related to the computation of Greeks in reduced LIBOR market models, which are standard computable approximations of the HJM-description of interest rate markets. The method leads to a probabilistic scheme for the computation of the value function and its sensitivities based on Malliavin calculus. From a practical perspective the main contribution of the paper is an Monte-Carlo algorithm which includes weight corrections for paths which move in time into a region where a (weak) Hoermander condition holds.

Date: 2010-02, Revised 2012-10
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