Structure preserving stochastic integration schemes in interest rate derivative modeling (Q2479422)
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scientific article; zbMATH DE number 5254140
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| English | Structure preserving stochastic integration schemes in interest rate derivative modeling |
scientific article; zbMATH DE number 5254140 |
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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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0.7916237711906433
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0.7828943133354187
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0.7659433484077454
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0.7659429907798767
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0.7592579126358032
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