Kernel-based collocation methods for Heath-Jarrow-Morton models with Musiela parametrization

Yuki Kinoshita and Yumiharu Nakano

Papers from arXiv.org

Abstract: We study kernel-based collocation methods for numerical solutions of Heath-Jarrow-Morton models in Musiela parametrization. The methods are Euler-Maruyama approximations of finite-dimensional stochastic differential equations and can be used with standard Monte Carlo procedures for derivative pricing. We give a conditional mean-square error estimate under explicit stability assumptions on the differentiated cardinal basis over the full evaluation region required by the volatility functional. The estimate uses the spatial-radius exponent dictated by the squared-error calculation. Two finite-resolution examples illustrate the method for a Vasicek model and for caplet pricing.

Date: 2018-09, Revised 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1809.05643

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