Mathematical Finance and Probability Seminars (Since covid these events are taking place online.)

In recent years, there has been an increasing interest in studying constrained variational problems with a fractional diffusion. One of the motivations comes from mathematical finance: jump-diffusion processes where incorporated by Merton into the theory of option evaluation to introduce discontinuous paths in the dynamics of the stock's prices, in contrast with the classical lognormal diffusion model of Black and Scholes. These models allow to take into account large price changes, and they have become increasingly popular for modeling market fluctuations, both for risk management and option pricing purposes.

In a joint paper with Luis Caffarelli we study the parabolic version of the fractional obstacle problem, i.e. where the elliptic part of the operator is given (at least at the leading order) by a fractional laplacian. We prove optimal spatial regularity and almost optimal time regularity of the solution, recovering in particular the optimal regularity for the stationary case. To obtain this result, we crucially exploit the fact that the solution coincides with the obstacle at the initial time, which corresponds to the fact that (for the backward operator) the stock's price coincides with the payoff at the final time.

Speaker: Alessio Figalli, University of Texas at Austin

Slides: (TBA)