Hp-DGFEM FOR KOLMOGOROV–FOKKER–PLANCK EQUATIONS OF MULTIVARIATE LÉVY PROCESSES

Abstract

We analyze the discretization of nonlocal degenerate integrodifferential equations arising as so-called forward equations for jump-diffusion processes. Such equations arise in option pricing problems when the stochastic dynamics of the markets is modeled by Lévy driven stochastic volatility models. Well-posedness of the arising equations is addressed. We develop and analyze stable discretization schemes, in particular the discontinuous Galerkin Finite Element Methods (DG-FEM). In the DG-FEM, a new regularization of hypersingular integrals in the Dirichlet form of the pure jump part of infinite variation processes is proposed, allowing in particular a stable DG discretization of hypersingular integral operators. Robustness of the stabilized discretization with respect to various degeneracies in the characteristic triple of the stochastic process is proved. We provide in particular an hp-error analysis of the DG-FEM. Numerical experiments for model equations confirm the theoretical results.