Numerical solution of a semilinear parabolic degenerate Hamilton-Jacobi-Bellman equation with singularity. (arXiv:1609.00702v1 [q-fin.MF])

We consider a semilinear parabolic degenerated Hamilton-Jacobi-Bellman (HJB) equation with singularity which is related to a stochastic control problem with fuel constraint. The fuel constraint translates into a singular initial condition for the HJB equation. We first propose a transformation based on a change of variables that gives rise to an equivalent HJB equation with nonsingular initial condition but irregular coefficients. We then construct explicit and implicit numerical schemes for solving the transformed HJB equation and prove their convergences by establishing an extension to the result of Barles and Souganidis (1991).