IDEAS home Printed from https://ideas.repec.org/a/taf/apmtfi/v27y2020i1-2p46-66.html
   My bibliography  Save this article

Numerical Ross Recovery for Diffusion Processes Using a PDE Approach

Author

Listed:
  • Lina von Sydow
  • Johan Walden

Abstract

We develop and analyse a numerical method for solving the Ross recovery problem for a diffusion problem with unbounded support, with a transition independent pricing kernel. Asset prices are assumed to only be available on a bounded subinterval $$B = [- N,N]$$B=[−N,N]. Theoretical error bounds on the recovered pricing kernel are derived, relating the convergence rate as a function of $$N$$N to the rate of mean reversion of the diffusion process. Our suggested numerical method for finding the pricing kernel employs finite differences, and we apply Sturm–Liouville theory to make use of inverse iteration on the resulting discretized eigenvalue problem. We numerically verify the derived error bounds on a test bench of three model problems.

Suggested Citation

  • Lina von Sydow & Johan Walden, 2020. "Numerical Ross Recovery for Diffusion Processes Using a PDE Approach," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(1-2), pages 46-66, July.
  • Handle: RePEc:taf:apmtfi:v:27:y:2020:i:1-2:p:46-66
    DOI: 10.1080/1350486X.2020.1730202
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1350486X.2020.1730202
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/1350486X.2020.1730202?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:27:y:2020:i:1-2:p:46-66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAMF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.