Exact Simulation of Quadratic Intensity Models

Yan Qu (), Angelos Dassios (), Anxin Liu () and Hongbiao Zhao ()
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Yan Qu: School of Economics and Management, Beijing University of Posts and Telecommunications, Beijing 100876, China
Angelos Dassios: Department of Statistics, London School of Economics, London WC2A 2AE, United Kingdom
Anxin Liu: School of Statistics and Management, Shanghai University of Finance and Economics, Shanghai 200433, China
Hongbiao Zhao: School of Statistics and Management, Shanghai University of Finance and Economics, Shanghai 200433, China

INFORMS Journal on Computing, 2025, vol. 37, issue 5, 1182-1201

Abstract: We develop efficient algorithms of exact simulation for quadratic stochastic intensity models that have become increasingly popular for modeling events arrivals, especially in economics, finance, and insurance. They have huge potential to be applied to many other areas such as operations management, queueing science, biostatistics, and epidemiology. Our algorithms are developed by the principle of exact distributional decomposition, which lies in a fully analytical expression for the joint Laplace transform of quadratic process and its integral newly derived in this paper. They do not involve any numerical Laplace inversion, have been validated by extensive numerical experiments, and substantially outperform all existing alternatives in the literature. Moreover, our algorithms are extendable to multidimensional point processes and beyond Cox processes to additionally incorporate two-sided random jumps with arbitrarily distributed sizes in the intensity for capturing self-exciting and self-correcting effects in event arrivals. Applications to portfolio loss modeling are provided to demonstrate the applicability and flexibility of our algorithms.

Keywords: exact simulation; Monte Carlo simulation; stochastic intensity models; quadratic intensity models; point processes; doubly stochastic Poisson processes; Cox processes; self-exciting process; self-correcting process; portfolio credit risk (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:orijoc:v:37:y:2025:i:5:p:1182-1201

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