Second-Order Weak Approximations of CKLS and CEV Processes by Discrete Random Variables

Gytenis Lileika and Vigirdas Mackevičius
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Gytenis Lileika: Institute of Mathematics, Faculty of Mathematics and Informatics, Vilnius University, Naugarduko 24, 03225 Vilnius, Lithuania
Vigirdas Mackevičius: Institute of Mathematics, Faculty of Mathematics and Informatics, Vilnius University, Naugarduko 24, 03225 Vilnius, Lithuania

Mathematics, 2021, vol. 9, issue 12, 1-20

Abstract: In this paper, we construct second-order weak split-step approximations of the CKLS and CEV processes that use generation of a three?valued random variable at each discretization step without switching to another scheme near zero, unlike other known schemes (Alfonsi, 2010; Mackevi?ius, 2011). To the best of our knowledge, no second-order weak approximations for the CKLS processes were constructed before. The accuracy of constructed approximations is illustrated by several simulation examples with comparison with schemes of Alfonsi in the particular case of the CIR process and our first-order approximations of the CKLS processes (Lileika– Mackevi?ius, 2020).

Keywords: weak approximations; second-order; split-step; CKLS; CEV (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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