Simulation of volatility modulated Volterra processes using hyperbolic stochastic partial differential equations

Fred Espen Benth and Heidar Eyjolfsson

Papers from arXiv.org

Abstract: We propose a finite difference scheme to simulate solutions to a certain type of hyperbolic stochastic partial differential equation (HSPDE). These solutions can in turn estimate so called volatility modulated Volterra (VMV) processes and L\'{e}vy semistationary (LSS) processes, which is a class of processes that have been employed to model turbulence, tumor growth and electricity forward and spot prices. We will see that our finite difference scheme converges to the solution of the HSPDE as we take finer and finer partitions for our finite difference scheme in both time and space. Finally, we demonstrate our method with an example from the energy finance literature.

Date: 2016-02
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Published in Bernoulli 2016, Vol. 22, No. 2, 774-793

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1602.02907

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