Adaptive stochastic weak approximation of degenerate parabolic equations of Kolmogorov type (Q964936)

The purpose of this paper is to numerically solve the Cauchy problem for a general class of second order degenerate parabolic differential operators of Kolmogorov type with variable coefficients using a posteriori estimates and an algorithm for adaptive weak approximation of stochastic differential equations. This approach is due to \textit{A. Szepessy, R. Tempone} and \textit{G. E. Zouraris} [Commun. Pure Appl. Math. 54, No.~10, 1169--1214 (2001; Zbl 1024.60028)] in the case of uniformly elliptic operators, and is extended to the present hypoelliptic case using facts from Malliavin calculus. These results are applied to the problem of pricing European derivatives in the framework of a stochastic volatility model. The efficiency of the method is compared to that of finite-difference methods. One advantage of the method is that one can ensure with high probability that it produces a result which is within the user defined error tolerance of the correct value. A numerical example and the used algorithms are displayed at the end of the paper.