The non-locality of Markov chain approximations to two-dimensional diffusions

DOI10.1016/J.MATCOM.2016.06.001MaRDI QIDQ1996948zbMATH OpenOpenAlexFDO

Authors C. Reisinger

Publication date 1 March 2021

Published in Mathematics and Computers in Simulation (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1605.06348

zbMATH Keywords

Markov chain approximationsmonotone finite difference schemestwo-dimensional diffusions

Mathematics Subject Classification ID

Numerical analysis or methods applied to Markov chains (65C40) Markov chains (discrete-time Markov processes on discrete state spaces) (60J10) Diffusion processes (60J60) Applications of difference equations (39A60)

Abstract: In this short paper, we consider discrete-time Markov chains on lattices as approximations to continuous-time diffusion processes. The approximations can be interpreted as finite difference schemes for the generator of the process. We derive conditions on the diffusion coefficients which permit transition probabilities to match locally first and second moments. We derive a novel formula which expresses how the matching becomes more difficult for larger (absolute) correlations and strongly anisotropic processes, such that instantaneous moves to more distant neighbours on the lattice have to be allowed. Roughly speaking, for non-zero correlations, the distance covered in one timestep is proportional to the ratio of volatilities in the two directions. We discuss the implications to Markov decision processes and the convergence analysis of approximations to Hamilton-Jacobi-Bellman equations in the Barles-Souganidis framework.

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(6)

• Markov chain approximations to nonsymmetric diffusions with bounded coefficients
• Analysis and computation of a discrete costly observation model for growth estimation and management of biological resources
• Executive stock option exercise with full and partial information on a drift change point
• A numerical scheme for the quantile hedging problem
• High-order filtered schemes for time-dependent second order HJB equations
• Optimal harvesting policy of an inland fishery resource under incomplete information

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