Moate Simulation of Stochastic Processes

Michael E. Mura

Papers from arXiv.org

Abstract: A novel approach called Moate Simulation is presented to provide an accurate numerical evolution of probability distribution functions represented on grids arising from stochastic differential processes where initial conditions are specified. Where the variables of stochastic differential equations may be transformed via It\^o-Doeblin calculus into stochastic differentials with a constant diffusion term, the probability distribution function for these variables can be simulated in discrete time steps. The drift is applied directly to a volume element of the distribution while the stochastic diffusion term is applied through the use of convolution techniques such as Fast or Discrete Fourier Transforms. This allows for highly accurate distributions to be efficiently simulated to a given time horizon and may be employed in one, two or higher dimensional expectation integrals, e.g. for pricing of financial derivatives. The Moate Simulation approach forms a more accurate and considerably faster alternative to Monte Carlo Simulation for many applications while retaining the opportunity to alter the distribution in mid-simulation.

Date: 2022-12
New Economics Papers: this item is included in nep-cmp
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