 The non-locality of Markov chain approximations to two-dimensional diffusionsC. Reisinger Mathematics and Computers in Simulation (MATCOM), 2018, vol. 143, issue C, 176-185 Abstract: In this short paper, we consider discrete-time Markov chains on lattices as approximations to continuous-time diffusion processes. The approximations can be interpreted as finite difference schemes for the generator of the process. We derive conditions on the diffusion coefficients which permit transition probabilities to match locally first and second moments. We derive a novel formula which expresses how the matching becomes more difficult for larger (absolute) correlations and strongly anisotropic processes, such that instantaneous moves to more distant neighbours on the lattice have to be allowed. Roughly speaking, for non-zero correlations, the distance covered in one timestep is proportional to the ratio of volatilities in the two directions. We discuss the implications to Markov decision processes and the convergence analysis of approximations to Hamilton–Jacobi–Bellman equations in the Barles–Souganidis framework. Keywords: Two-dimensional diffusions; Markov chain approximations; Monotone finite difference schemes (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:143:y:2018:i:c:p:176-185 DOI: 10.1016/j.matcom.2016.06.001 Access Statistics for this article Mathematics and Computers in Simulation (MATCOM) is currently edited by Robert Beauwens More articles in Mathematics and Computers in Simulation (MATCOM) from Elsevier |
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