|Date: Wednesday, January 29, 2020
Location: 1360 East Hall (4:00 PM to 5:00 PM)
Title: Inverting the Markovian projection, with an application to local stochastic volatility models
Abstract: This talk is about a class of two-dimensional stochastic differential equations (SDEs) of McKean--Vlasov type in which the conditional distribution of the second component given the first appears in the equation for the first component. Such SDEs arise when one tries to invert the Markovian projection developed by Gyöngy (1986) and Brunick-Shreve (2013), typically to produce an Itô process with the same fixed-time marginal distributions as a given one-dimensional diffusion but with richer dynamical features. We prove the strong existence of stationary solutions for these SDEs, as well as their strong uniqueness in an important special case, by studying the associated (nonlinear, nonlocal) elliptic PDE. Variants of the SDEs discussed in this paper enjoy frequent application in the calibration of local stochastic volatility models in finance, despite the very limited theoretical understanding. Based on joint work with Mykhaylo Shkolnikov and Jiacheng Zhang.
Speaker: Daniel Lacker
Institution: Columbia University