On the simulation of iterated Itô integrals

Magnus Wiktorsson, Tobias Rydén

Research output: Contribution to journalArticlepeer-review

46 Citations (SciVal)

Abstract

We consider algorithms for simulation of iterated Itô integrals with
application to simulation of stochastic differential equations. The
fact that the iterated Itô integral
I_{ij}(t_n,t_n+h)=\int_{t_n}^{t_n+h} \int_{t_n}^{s} dW_{i}(u)dW_{j}(s)
conditioned on W_i(t_n+h)-W_i(t_n) and W_j(t_n+h)-W_j(t_n), has an
infinitely divisible distribution is utilised for the simultaneous
simulation of $I_{ij}(t_n,t_n+h)$,W_{i}(t_n+h)-W_{i}(t_n) and
W_j(t_n+h)-W_j(t_n). Different simulation methods for the iterated
Itô integrals are investigated. We show mean square convergence rates
for approximations of shot-noise type and asymptotic normality of the
remainder of the approximations. This together with the fact that the
conditional distribution of I_{ij}(t_n,t_n+h), apart from an additive
constant, is a Gaussian variance mixture is used to achieve an
improved convergence rate. This is done by a coupling method for the
remainder of the approximation.
Original languageEnglish
Pages (from-to)151-168
JournalStochastic Processes and their Applications
Volume91
Issue number1
DOIs
Publication statusPublished - 2001

Subject classification (UKÄ)

  • Probability Theory and Statistics

Keywords

  • Iterated Itô integral
  • Infinitely divisible distribution
  • Multi-dimensional stochastic differential equation
  • Numerical approximation
  • Class G distribution
  • Variance mixture
  • Coupling

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