A Dual Method For Backward Stochastic Differential Equations with Application to Risk Valuation

Andrzej Ruszczynski () and Jianing Yao

Papers from arXiv.org

Abstract: We propose a numerical recipe for risk evaluation defined by a backward stochastic differential equation. Using dual representation of the risk measure, we convert the risk valuation to a stochastic control problem where the control is a certain Radon-Nikodym derivative process. By exploring the maximum principle, we show that a piecewise-constant dual control provides a good approximation on a short interval. A dynamic programming algorithm extends the approximation to a finite time horizon. Finally, we illustrate the application of the procedure to financial risk management in conjunction with nested simulation and on an multidimensional portfolio valuation problem.

Date: 2017-01, Revised 2020-08
New Economics Papers: this item is included in nep-rmg and nep-upt
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Published in ESAIM: COCV, 2020

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1701.06234

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