A stability estimate of an inverse problem in financial prospection

摘要

In many option pricing models, there is a need to derive a stability estimate of their solutions. This paper is concerned with the stability estimate of the regularized solution arising in the inverse problem of option pricing. This kind of inverse problems, where one looks for causes for observed or desired effects, are usually “ill-posed”, i.e., their solution is not unique or unstable with respect to data perturbations. Stability estimate is needed for stable solution of these ill-posed problems. If one cannot guarantee the stability of a solution to these problems, then the problem does not make sense and there is no hope of handling them numerically. It is shown here that one can achieve stability by using so called stabilizing functional suggested by Tikhonov [Linear Integral Equation, Applied Mathematical Sciences, Springer, New york, 1989].