Density estimates and short-time asymptotics for a hypoelliptic diffusion process

Paolo Pigato

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arXiv · 2004.06541

Density estimates and short-time asymptotics for a hypoelliptic diffusion process

Paolo Pigato

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Abstract

We study a system of $n$ differential equations, each in dimension $d$. Only the first equation is forced by a Brownian motion and the dependence structure is such that, under a local weak H\"ormander condition, the noise propagates to the whole system. We prove upper bounds for the transition density (heat kernel) and its derivatives of any order. Then we give precise short-time asymptotics of the density at a suitable central limit time scale. Both these results account for the different non-diffusive scales of propagation in the various components. Finally, we provide a valuation formula for short-maturity at-the-money Asian basket options under correlated local volatility dynamics.

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Paolo Pigato. 2020-04-14. Density estimates and short-time asymptotics for a hypoelliptic diffusion process. https://arxiv.org/abs/2004.06541

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