Old Problems, Classical Methods, New Solutions
Abstract
We use a powerful extension of the classical method of heat potentials, recently developed by the present author and his collaborators, to solve several significant problems of financial mathematics. We consider the following problems in detail: (A) calibrating the default boundary in the structural default framework to a constant default intensity; (B) calculating default probability for a representative bank in the mean-field framework; (C) finding the hitting time probability density of an Ornstein-Uhlenbeck process. Several other problems, including pricing American put options and finding optimal mean-reverting trading strategies, are mentioned in passing. Besides, two non-financial applications -- the supercooled Stefan problem and the integrate-and-fire neuroscience problem -- are briefly discussed as well.
Cite
@article{arxiv.2003.06903,
title = {Old Problems, Classical Methods, New Solutions},
author = {Alexander Lipton},
journal= {arXiv preprint arXiv:2003.06903},
year = {2020}
}
Comments
29 pages, 9 figures, Conference Proceedings "45 Years after the publication of the Black Scholes Merton Model", Jerusalem, 2018