The Euler-Maruyama approximation for the absorption time of the CEV diffusion (Q432579): Difference between revisions

Let the following stochastic differential equation \[ X_t = x + \int_0^t \mu X_s ds + \int_0^t \sigma X_s^{p} d B_s, \] where \(x \in \mathbb{R}_{+}, \mu \geq 0, \sigma > 0\) and \( p \in [1/2,1)\). By \(B_t\) we denote the Brownian motion defined on a filtered probability space \((\Omega, {\mathcal F}, ({\mathcal F}_t), \mathbb{P})\) satisfying the usual conditions. Consider now the continuous time process \(X^{\delta}\) which satisfies the Euler-Maruyama recursion at the grid points \(t_j\), \[ X^{\delta}_{t_j} = X^{\delta}_{t_{j-1}} + \mu (X^{\delta}_{t_{j-1}})^+ + \sigma (X^{\delta}_{t_{j-1}})^{+p} \xi_j \sqrt{\delta}, \] where \(\xi_j\) is a sequence of i.i.d \(N(0,1)\) random variables. Furthermore, let \[ \tau_{l}(X) = \inf \{ t \geq 0: X_t = l \}, \] which is the hitting time of the level \(l \in \mathbb{R}\). The main result of this paper is the following result: For any \(\beta \in (0, \frac{1/2}{1-p})\), \[ \tau_{\delta^{\beta}} (X^{\delta}) \to \tau_0(X), \quad \text{ as } \quad \delta \to 0, \] where the convergence is in the weak sense.