On Markov chain approximations for computing boundary crossing probabilities of diffusion processes

DOI10.1017/JPR.2023.11MaRDI QIDQ6148883zbMATH OpenOpenAlexFDO

Authors K. Borovkov

Publication date 12 January 2024

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

Full work available at URL https://arxiv.org/abs/2112.05268

zbMATH Keywords

Markov chainsdiffusion processesboundary crossing probability

Mathematics Subject Classification ID

Markov chains (discrete-time Markov processes on discrete state spaces) (60J10) Diffusion processes (60J60) Numerical solutions to stochastic differential and integral equations (65C30)

Abstract: We propose a discrete time discrete space Markov chain approximation with a Brownian bridge correction for computing curvilinear boundary crossing probabilities of a general diffusion process on a finite time interval. For broad classes of curvilinear boundaries and diffusion processes, we prove the convergence of the constructed approximations in the form of products of the respective substochastic matrices to the boundary crossing probabilities for the process as the time grid used to construct the Markov chains is getting finer. Numerical results indicate that the convergence rate for the proposed approximation with the Brownian bridge correction is $O(n^{-2})$ in the case of $C^2$-boundaries and a uniform time grid with $n$ steps.

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Cited in

(2)

• On extension of the Markov chain approximation method for computing Feynman-Kac type expectations
• On time-dependent boundary crossing probabilities of diffusion processes as differentiable functionals of the boundary

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