The Euler-Maruyama approximations for the CEV model (Q553454)

The constant elasticity of variance (CEV) model is given by the Ito's equation \[ X_t=X_0+\int_{0}^{t}\mu X_sds+ \int_{0}^{t}\sigma (X_0^+)^p dW_s, \] where \(\frac{1}{2}\leq p<1, \sigma >0 \), of which the solution describes a singular diffusion process \(X_t\) with non-Lipschitz diffusion coefficient, absorbed at zero with positive probability. In the present paper, it is shown that the Euler Maruyama approximation converges weakly to this diffusion in Skorohod metric on the time interval \([0,T]\), and the related ruin probability is also approximated by this scheme. A numerical simulation is provided.