High order discretization schemes for stochastic volatility models
From MaRDI portal
Abstract: In usual stochastic volatility models, the process driving the volatility of the asset price evolves according to an autonomous one-dimensional stochastic differential equation. We assume that the coefficients of this equation are smooth. Using It^o's formula, we get rid, in the asset price dynamics, of the stochastic integral with respect to the Brownian motion driving this SDE. Taking advantage of this structure, we propose - a scheme, based on the Milstein discretization of this SDE, with order one of weak trajectorial convergence for the asset price, - a scheme, based on the Ninomiya-Victoir discretization of this SDE, with order two of weak convergence for the asset price. We also propose a specific scheme with improved convergence properties when the volatility of the asset price is driven by an Orstein-Uhlenbeck process. We confirm the theoretical rates of convergence by numerical experiments and show that our schemes are well adapted to the multilevel Monte Carlo method introduced by Giles [2008a, 2008b].
This page was built for publication: High order discretization schemes for stochastic volatility models
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6215028)
