Difference-Quadrature Schemes for Nonlinear Degenerate Parabolic Integro-PDE
SIAM Journal on Numerical Analysis
Merton Problem with Taxes: Characterization, Computation, and Approximation
SIAM Journal on Financial Mathematics
SIAM Journal on Numerical Analysis
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We analyze a class of numerical schemes for solving the HJB equation for stochastic control problems, which enters the framework of Markov chain approximations and generalizes the usual finite difference method. The latter is known to be monotonic, and hence valid, only if the scaled covariance matrix is dominant diagonal. We generalize this result by, given the set of neighboring points allowed to enter the scheme, showing how to compute effectively the class of covariance matrices that is consistent with this set of points. We perform this computation for several cases in dimensions 2, 3, and 4.