On Markovian solutions to Markov Chain BSDEs
We study (backward) stochastic differential equations with noise coming from a finite state Markov chain. We show that, for the solutions of these equations to be `Markovian', in the sense that they are deterministic functions of the state of the underlying chain, the integrand must be of a specific form. This allows us to connect these equations to coupled systems of ODEs, and hence to give fast numerical methods for the evaluation of Markov-Chain BSDEs.
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- Yor, Marc & Madan, Dilip B. & Carr, Peter & Geman, Hélyette, 2004. "From Local Volatility to Local Levy Models," Economics Papers from University Paris Dauphine 123456789/1448, Paris Dauphine University.
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- Peter Carr & Helyette Geman & Dilip Madan & Marc Yor, 2004. "From local volatility to local Levy models," Quantitative Finance, Taylor & Francis Journals, vol. 4(5), pages 581-588.
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