A system of non-local parabolic PDE and application to option pricing

Abstract

This article includes a proof of well posedness of an initial-boundary value problem involving a system of non-local parabolic partial differential equation (PDE), which naturally arises in the study of derivative pricing in a generalized market model, which is known as a semi-Markov modulated geometric Brownian motion (GBM) model We study the well posedness of the problem via a Volterra integral equation of second kind. A probabilistic approach, in particular the method of conditioning on stopping times is used for showing the uniqueness.