C^{1,1} regularity for degenerate elliptic obstacle problems

Panagiota Daskalopoulos and Paul M. N. Feehan

Papers from arXiv.org

Abstract: The Heston stochastic volatility process is a degenerate diffusion process where the degeneracy in the diffusion coefficient is proportional to the square root of the distance to the boundary of the half-plane. The generator of this process with killing, called the elliptic Heston operator, is a second-order, degenerate-elliptic partial differential operator, where the degeneracy in the operator symbol is proportional to the distance to the boundary of the half-plane. In mathematical finance, solutions to the obstacle problem for the elliptic Heston operator correspond to value functions for perpetual American-style options on the underlying asset. With the aid of weighted Sobolev spaces and weighted Holder spaces, we establish the optimal $C^{1,1}$ regularity (up to the boundary of the half-plane) for solutions to obstacle problems for the elliptic Heston operator when the obstacle functions are sufficiently smooth.

Date: 2012-06, Revised 2016-01
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Published in Journal of Differential Equations 260 (2016), 5043-5074

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