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Numerical Schemes for Variational Inequalities Arising in International Asset Pricing

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  • Hodder, James E
  • Tourin, Agnes
  • Zariphopoulou, Thaleia

Abstract

This paper introduces a valuation model of international pricing in the presence of political risk. Shipments between countries are charged with shipping costs and the country specific production processes are modelled as diffusion processes. The political risk is modelled as a continuous time jump process that affects the drift of the returns in the politically unstable countries. The valuation model gives rise to a singular stochastic control problem that is analyzed numerically. The fundamental tools come from the theory of viscosity solutions of the associated Hamilton-Jacobi-Bellman equation which turns out to be a system of integral-differential Variational Inequalities with gradient constraints. Copyright 2001 by Kluwer Academic Publishers

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  • Hodder, James E & Tourin, Agnes & Zariphopoulou, Thaleia, 2001. "Numerical Schemes for Variational Inequalities Arising in International Asset Pricing," Computational Economics, Springer;Society for Computational Economics, vol. 17(1), pages 43-80, February.
    • Handle: RePEc:kap:compec:v:17:y:2001:i:1:p:43-80
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    Cited by:

    1. Roland Herzog & Karl Kunisch & Jörn Sass, 2013. "Primal-dual methods for the computation of trading regions under proportional transaction costs," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 77(1), pages 101-130, February.
    2. Wen Li & Song Wang, 2014. "A numerical method for pricing European options with proportional transaction costs," Journal of Global Optimization, Springer, vol. 60(1), pages 59-78, September.

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