Stochastic Perron’s Method and Verification without Smoothness Using Viscosity Comparison: the Linear Case

We introduce a stochastic version of the classical Perron’s method to construct viscosity solutions to linear parabolic equations associated to stochastic differential equations. Using this method, we construct easily two viscosity (sub and super) solutions that squeeze in between the expected payoff. If a comparison result holds true, then there exists a unique viscosity solution which is a martingale along the solutions of the stochastic differential equation. The unique viscosity solution is actually equal to the expected payoff. This amounts to a verification result (Itô’s Lemma) for non-smooth viscosity solutions of the linear parabolic equation.