Classical solutions to reaction-diffusion systems for hedging problems with interacting Ito and point processes

Dirk Becherer, Martin Schweizer

Published 2005-05-11Version 1

We use probabilistic methods to study classical solutions for systems of interacting semilinear parabolic partial differential equations. In a modeling framework for a financial market with interacting Ito and point processes, such PDEs are shown to provide a natural description for the solution of hedging and valuation problems for contingent claims with a recursive payoff structure.