SIMPLE SIMULATION SCHEMES FOR CIR AND WISHART PROCESSES

Paolo Baldi () and Camilla Pisani ()
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Paolo Baldi: Dipartimento di Matematica, Università di Roma Tor Vergata, via della Ricerca Scientifica 1, 00133 Roma, Italia
Camilla Pisani: Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 08, 1-15

Abstract: We develop some simple simulation algorithms for CIR and Wishart processes. We investigate rigorously the square of a matrix valued Ornstein–Uhlenbeck process, the main idea being to split the generator and to reduce the problem to the simulation of the square of a matrix valued Ornstein–Uhlenbeck process to be added to a deterministic process. In this way, we provide a weak second-order scheme that requires only the simulation of i.i.d. Gaussian r.v.'s and simple matrix manipulations.

Keywords: Stochastic simulation; composition rules; Wishart processes; CIR model; matrix-valued Ornstein–Uhlenbeck processes (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S0219024913500453

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