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Optimal systems of subalgebras for a nonlinear Black-Scholes equation

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  • Maxim Bobrov
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    Abstract

    The main object of our study is a four dimensional Lie algebra which describes the symmetry properties of a nonlinear Black-Scholes model. This model implements a feedback effect which is typical for an illiquid market. The structure of the Lie algebra depends on one parameter, i.e. we have to do with a one-parametric family of algebras. We provide a classification of these algebras using Patera--Winternitz method. Optimal systems of one-, two- and three- dimensional subalgebras are described for the family of symmetry algebras of the nonlinear Black-Scholes equation. The optimal systems give us the possibility to describe a complete set of invariant solutions to the equation.

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    File URL: http://arxiv.org/pdf/0901.2826
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    Paper provided by arXiv.org in its series Papers with number 0901.2826.

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    Date of creation: Jan 2009
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    Handle: RePEc:arx:papers:0901.2826

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    Web page: http://arxiv.org/

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