Symmetry reduction and exact solutions of the non-linear Black--Scholes equation

TL;DR

This paper reduces a nonlinear Black--Scholes equation to a simpler form using symmetry transformations, analyzes its invariance properties, and derives exact solutions applicable to financial boundary value problems.

Contribution

It introduces a point transformation that simplifies the nonlinear Black--Scholes equation and provides its symmetry analysis and exact solutions.

Findings

Reduced the nonlinear Black--Scholes equation to a simpler form.

Identified the maximal Lie algebra of invariance for the reduced equation.

Derived exact group-invariant solutions and applied them to boundary value problems.

Abstract

In this paper, we investigate the non-linear Black--Scholes equation: $$u_t+ax^2u_{xx}+bx^3u_{xx}^2+c(xu_x-u)=0,\quad a,b>0,\ c\geq0.$$ and show that the one can be reduced to the equation $$u_t+(u_{xx}+u_x)^2=0$$ by an appropriate point transformation of variables. For the resulting equation, we study the group-theoretic properties, namely, we find the maximal algebra of invariance of its in Lie sense, carry out the symmetry reduction and seek for a number of exact group-invariant solutions of the equation. Using the results obtained, we get a number of exact solutions of the Black--Scholes equation under study and apply the ones to resolving several boundary value problems with appropriate from the economic point of view terminal and boundary conditions.