Financial Engineering

Distributed Parameter Systems Control and Its Applications to Financial Engineering, the Law and other Social Sciences

The chapter analyzes differential flatness theory for the control of single asset and multi-asset option price dynamics, described by PDE models. Through these control methods, stabilization of distributed parameter (PDE modelled) financial systems is achieved and convergence to specific financial performance indexes is made possible. The main financial model used in the chapter is the Black-Scholes PDE. By applying semi-discretization and a finite differences scheme the single-asset (equivalently multi-asset) Black-Scholes PDE is transformed into a state-space model consisting of ordinary nonlinear differential equations. For this set of differential equations it is shown that differential flatness properties hold. This enables to solve the associated control problem and to stabilize the options' dynamics. By showing the feasibility of control of the single-asset (equivalently multi-asset) Black-Scholes PDE it is proven that through selected purchases and sales during the trading procedure, the price of options can be made to converge and stabilize at specific reference values.[1]

Resources

Notes and References

1. Gerasimos Rigatos, Antonio Piccolo, “Distributed parameter systems control and its applications to financial engineering” (Encyclopedia of Information Science and Technology, 4th Edition, Information Resources Management Association, 2018)