Structure preserving stochastic integration schemes in interest rate derivative modeling (Q2479422): Difference between revisions

From the authors' abstract: The numerical simulation of extended Libor market models used to value structured interest rate derivatives has to preserve positivity or boundedness of the underlying stochastic processes used to model mean-reverting volatility or forward rates. This paper discusses how stochastic integration schemes can be constructed in order to maintain these properties of the analytical solution. Milstein-type methods prove to be the method-of-choice with respect to both efficiency and preservation of structural properties. These theoretical results are confirmed by numerical tests.