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On the martingale problem for degenerate-parabolic partial differential operators with unbounded coefficients and a mimicking theorem for Ito processes

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  • Paul M. N. Feehan
  • Camelia Pop
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    Abstract

    Using results from our companion article [arxiv.org:1112.4824v2] on a Schauder approach to existence of solutions to a degenerate-parabolic partial differential equation, we solve three intertwined problems, motivated by probability theory and mathematical finance, concerning degenerate diffusion processes. We show that the martingale problem associated with a degenerate-elliptic differential operator with unbounded, locally Holder continuous coefficients on a half-space is well-posed in the sense of Stroock and Varadhan. Second, we prove existence, uniqueness, and the strong Markov property for weak solutions to a stochastic differential equation with degenerate diffusion and unbounded coefficients with suitable H\"older continuity properties. Third, for an Ito process with degenerate diffusion and unbounded but appropriately regular coefficients, we prove existence of a strong Markov process, unique in the sense of probability law, whose one-dimensional marginal probability distributions match those of the given Ito process.

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    File URL: http://arxiv.org/pdf/1211.4636
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    Paper provided by arXiv.org in its series Papers with number 1211.4636.

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    Date of creation: Nov 2012
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    Handle: RePEc:arx:papers:1211.4636

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    1. Marc Atlan, 2006. "Localizing Volatilities," Papers math/0604316, arXiv.org.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
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