December 2013
Intermediate to advanced
484 pages
14h 54m
English
Content preview from Nonlinear Option Pricing
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Chapter 7
Backward Stochastic Differential
Equations
I find it hard to focus looking forward. So I look backward.
— Iggy Pop
In this chapter, we introduce backward stochastic differential equations (in
short BSDEs). Recently, first order BSDEs (1-BSDEs) have attracted atten-
tion in the mathematical finance community, see El Karoui et al. [101] for
references and a review of applications. One of the key features of 1-BSDEs
is that they provide a probabilistic representation of solutions of nonlinear
parabolic PDEs, generalizing the Feynman-Kac formula. However, the cor-
responding PDEs cannot be nonlinear in the second order derivative and are
therefore connected ...
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