Structure preserving stochastic integration schemes in interest rate derivative modeling (Q2479422)

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Structure preserving stochastic integration schemes in interest rate derivative modeling
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    Structure preserving stochastic integration schemes in interest rate derivative modeling (English)
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    26 March 2008
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    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.
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    stochastic differential equation
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    structure-preserving
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    positivity
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    eternal life span
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    Milstein schemes
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    Libor market models
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    mean reverting
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    forward rate model
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    displaced diffusion
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    constant elasticity of variance
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    stochastic integration
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    numerical tests
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