Wednesday, May 19, 2021 — 5:00 pm — online talk

Abstract: We adapt and extend Yosida’s parametrix method, originally introduced for the construction of the fundamental solution to a parabolic operator on a Riemannian manifold, to derive Varadhan-type asymptotic estimates for the transition density of a degenerate diffusion under the weak H\”ormander condition. This diffusion process, widely studied by Yor in a series of papers, finds direct application in the study of a class of path-dependent financial derivatives known as Asian options. We obtain the Varadhan formula
$$\frac{-2 \log p(t,x;T,y) } { \Psi(t,x;T,y) } \to 1, \qquad \text{as} \quad T-t \to 0^+,$$
where $\Psi$ denotes the optimal cost function of a deterministic control problem associated to the diffusion. We provide a partial proof of this formula, and present numerical evidence to support the validity of an intermediate inequality that is required to complete the proof. We also derive an asymptotic expansion of the cost function $\Psi$, expressed in terms of elementary functions, which is useful in order to design efficient approximation formulas for the transition density.