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Perturbative Expansion Technique for Non-linear FBSDEs with Interacting Particle Method

  • Masaaki Fujii

    (Graduate School of Economics, The University of Tokyo)

  • Akihiko Takahashi

    (Graduate School of Economics, University of Tokyo)

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    In this paper, we propose an efficient Monte Carlo implementation of a non-linear FBSDE as a system of interacting particles inspired by the idea of the branching diffusion method of McKean. It will be particularly useful to investigate large and complex systems, and hence it is a good complement of our previous work presenting an analytical perturbation procedure for generic non-linear FBSDEs. There appear multiple species of particles, where the first one follows the diffusion of the original underlying state, and the others the Malliavin derivatives with a grading structure. The number of branching points are capped by the order of perturbation, which is expected to make the scheme less numerically intensive. The proposed method can be applied to semi-linear problems, such as American Options, Credit and Funding Value Adjustments, and even fully non-linear issues, such as the optimal portfolio problems in incomplete and/or constrained markets.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/F278.pdf
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    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-278.

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    Length: 22 pages
    Date of creation: Apr 2012
    Date of revision: Jan 2015
    Handle: RePEc:cfi:fseres:cf278
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