Year: 2023
Type: preprint
Abstract: The Nobel Prize winning Black-Scholes equation for stock options and the heat equation can both be written in the form \[ \frac{\partial u}{\partial t}=P_2(A)u, \] where $P_2(z)=αz^2+ βz+γ$ is a quadratic polynomial with $α> 0$. In fact, taking $A = x\frac{\partial}{\partial x}$ on functions on $[0,\infty) \times [0,\infty)$ the previous equality reduces to the Black-Scholes equation, while taking $A = \frac{\partial}{\partial x}$ for functions on $\mathbb{R} \times [0,\infty)$ it becomes the heat equation. Here, we ``connect'' the two previous problems by considering the generalized operator $A= x^a\frac{\partial}{\partial x}$ for functions on $[0,\infty) \times [0,\infty)$ with $0
Source: arXiv (Cornell University)
Institutions: University of Bari Aldo Moro, University of Memphis
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4389363532