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A numerical algorithm for fully nonlinear HJB equations: an approach by control randomization

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Abstract

We propose a probabilistic numerical algorithm to solve Backward Stochastic Differential Equations (BSDEs) with nonnegative jumps, a class of BSDEs introduced in [9] for representing fully nonlinear HJB equations. In particular, this allows us to numerically solve stochastic control problems with controlled volatility, possibly degenerate. Our backward scheme, based on least-squares regressions, takes advantage of high-dimensional properties of Monte-Carlo methods, and also provides a parametric estimate in feedback form for the optimal control. A partial analysis of the error of the scheme is provided, as well as numerical tests on the problem of superreplication of option with uncertain volatilities and/or correlations, including a detailed comparison with the numerical results from the alternative scheme proposed in [7].
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Dates and versions

hal-00905899 , version 1 (18-11-2013)

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Idris Kharroubi, Nicolas Langrené, Huyên Pham. A numerical algorithm for fully nonlinear HJB equations: an approach by control randomization. 2013. ⟨hal-00905899⟩
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