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Speeding up the Euler scheme for killed diffusions

Cetin, Umut ORCID: 0000-0001-8905-853X and Hok, Julien (2023) Speeding up the Euler scheme for killed diffusions. Finance and Stochastics. ISSN 0949-2984 (In Press)

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Abstract

Let X be a linear diffusion taking values in (ℓ,r) and consider the standard Euler scheme to compute an approximation to [g(XT)1[T<ζ]] for a given function g and a deterministic T, where ζ=inf{t≥0:Xt∉(ℓ,r)}. It is well-known since \cite{GobetKilled} that the presence of killing introduces a loss of accuracy and reduces the weak convergence rate to 1/N‾‾√ with N being the number of discretisatons. We introduce a drift-implicit Euler method to bring the convergence rate back to 1/N, i.e. the optimal rate in the absence of killing, using the theory of recurrent transformations developed in \cite{rectr}. Although the current setup assumes a one-dimensional setting, multidimensional extension is within reach as soon as a systematic treatment of recurrent transformations is available in higher dimensions.

Item Type: Article
Official URL: https://link.springer.com/journal/780
Additional Information: © 2023 Springer
Divisions: Statistics
Subjects: H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C0 - General > C00 - General
Date Deposited: 17 Nov 2023 17:30
Last Modified: 22 Jan 2024 09:15
URI: http://eprints.lse.ac.uk/id/eprint/120789

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