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Semi-analytical solution of a McKean–Vlasov equation with feedback through hitting a boundary
Published online by Cambridge University Press: 16 December 2019
Abstract
In this paper, we study the nonlinear diffusion equation associated with a particle system where the common drift depends on the rate of absorption of particles at a boundary. We provide an interpretation of this equation, which is also related to the supercooled Stefan problem, as a structural credit risk model with default contagion in a large interconnected banking system. Using the method of heat potentials, we derive a coupled system of Volterra integral equations for the transition density and for the loss through absorption. An approximation by expansion is given for a small interaction parameter. We also present a numerical solution algorithm and conduct computational tests.
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- Information
- European Journal of Applied Mathematics , Volume 32 , Special Issue 6: Special issue featuring papers on Professor Sam Howison , December 2021 , pp. 1035 - 1068
- Copyright
- © The Author(s), 2019. Published by Cambridge University Press
Footnotes
Vadim Kaushansky gratefully acknowledges support from the Economic and Social Research Council and Bank of America Merrill Lynch.
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