Crossing probabilities for diffusion processes with piecewise continuous boundaries

DOI10.1007/S11009-006-9002-6MaRDI QIDQ2642479zbMATH OpenOpenAlexFDO

Authors Liqun Wang, Klaus Pötzelberger

Publication date 17 August 2007

Published in Methodology and Computing in Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0612337

zbMATH Keywords

Boundary crossing probabilitiesBrownian motionDiffusion processFirst hitting timeFirst passage timeWiener process

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) Continuous-time Markov processes on general state spaces (60J25) Diffusion processes (60J60) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Monte Carlo methods (65C05)

Abstract: We propose an approach to compute the boundary crossing probabilities for a class of diffusion processes which can be expressed as piecewise monotone (not necessarily one-to-one) functionals of a standard Brownian motion. This class includes many interesting processes in real applications, e.g., Ornstein-Uhlenbeck, growth processes and geometric Brownian motion with time dependent drift. This method applies to both one-sided and two-sided general nonlinear boundaries, which may be discontinuous. Using this approach explicit formulas for boundary crossing probabilities for certain nonlinear boundaries are obtained, which are useful in evaluation and comparison of various omputational algorithms. Moreover, numerical computation can be easily done by Monte Carlo integration and the approximation errors for general boundaries are automatically calculated. Some numerical examples are presented.

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