Error distributions for random grid approximations of multidimensional stochastic integrals

DOI10.1214/12-AAP858MaRDI QIDQ1948705zbMATH OpenOpenAlexFDO

Authors Carl Lindberg, Holger Rootzén

Publication date 24 April 2013

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1108.5063, https://projecteuclid.org/euclid.aoap/1360682031

zbMATH Keywords

approximation errordiscrete option hedgingjoint weak convergencemultidimensional stochastic differential equationportfolio tracking errorrandom evaluation timesrandom gridstochastic integrals

Mathematics Subject Classification ID

Central limit and other weak theorems (60F05) Martingales with continuous parameter (60G44) Stochastic integrals (60H05) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: This paper proves joint convergence of the approximation error for several stochastic integrals with respect to local Brownian semimartingales, for nonequidistant and random grids. The conditions needed for convergence are that the Lebesgue integrals of the integrands tend uniformly to zero and that the squared variation and covariation processes converge. The paper also provides tools which simplify checking these conditions and which extend the range for the results. These results are used to prove an explicit limit theorem for random grid approximations of integrals based on solutions of multidimensional SDEs, and to find ways to "design" and optimize the distribution of the approximation error. As examples we briefly discuss strategies for discrete option hedging.

Review text

The authors study discrete approximations of stochastic integrals with respect to multidimensional Brownian semimartingales. Specifically, a functional central limit theorem (in the sense of stable convergence) is proved for the approximation error, extending the result of \textit{H. Rootzen} [Ann. Probab. 8, 241--251 (1980; Zbl 0428.60068)] to a multidimensional setting, going beyond equidistant/non-random approximation grids and Brownian motions as driven processes. The limiting process is a continuous semimartingale with mixed Gaussian finite-dimensional laws. Additionally, the authors discuss how to choose the (random) approximation grids optimally, in order to minimize the asymptotic approximation error. Finally, the methods are applied to discrete hedging of derivatives in the Black--Scholes model.

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Cited in

(5)

• Asymptotic error distribution for the Riemann approximation of integrals driven by fractional Brownian motion
• Discretization error of irregular sampling approximations of stochastic integrals
• scientific article; zbMATH DE number 3923793 (Why is no real title available?)
• scientific article; zbMATH DE number 2237966 (Why is no real title available?)
• Discretization error of stochastic integrals

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