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Robustness of the Black-Scholes approach in the case of options on several assets

Listed author(s):
  • Tiziano Vargiolu


    (Dipartimento di Matematica Pura ed Applicata, Universitá di Padova, Via Belzoni 7, 35131 Padova, Italy Manuscript)

  • Silvia Romagnoli


    (Istituto di Matematica Generale e Finanziaria, Universitá di Bologna, Piazza Scaravilli 2, 40139 Bologna, Italy)

In this paper we analyse a stochastic volatility model that is an extension of the traditional Black-Scholes one. We price European options on several assets by using a superstrategy approach. We characterize the Markov superstrategies, and show that they are linked to a nonlinear PDE, called the Black-Scholes-Barenblatt (BSB) equation. This equation is the Hamilton-Jacobi-Bellman equation of an optimal control problem, which has a nice financial interpretation. Then we analyse the optimization problem included in the BSB equation and give some sufficient conditions for reduction of the BSB equation to a linear Black-Scholes equation. Some examples are given.

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Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 4 (2000)
Issue (Month): 3 ()
Pages: 325-341

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Handle: RePEc:spr:finsto:v:4:y:2000:i:3:p:325-341
Note: received: April 1998; final revision received: May 1999
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