Stopped diffusion processes: Boundary corrections and overshoot

Emmanuel Gobet and Stephane Menozzi

Stochastic Processes and their Applications, 2010, vol. 120, issue 2, 130-162

Abstract: For a stopped diffusion process in a multidimensional time-dependent domain , we propose and analyse a new procedure consisting in simulating the process with an Euler scheme with step size [Delta] and stopping it at discrete times in a modified domain, whose boundary has been appropriately shifted. The shift is locally in the direction of the inward normal n(t,x) at any point (t,x) on the parabolic boundary of , and its amplitude is equal to where [sigma] stands for the diffusion coefficient of the process. The procedure is thus extremely easy to use. In addition, we prove that the rate of convergence w.r.t. [Delta] for the associated weak error is higher than without shifting, generalizing the previous results by Broadie et al. (1997) [6] obtained for the one-dimensional Brownian motion. For this, we establish in full generality the asymptotics of the triplet exit time/exit position/overshoot for the discretely stopped Euler scheme. Here, the overshoot means the distance to the boundary of the process when it exits the domain. Numerical experiments support these results.

Keywords: Stopped; diffusion; Time-dependent; domain; Brownian; overshoot; Boundary; sensitivity (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (10)

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