A weak approximation with asymptotic expansion and multidimensional Malliavin weights

DOI10.1214/15-AAP1105MaRDI QIDQ292908zbMATHFDO

Authors Akihiko Takahashi, Toshihiro Yamada

Publication date 9 June 2016

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

Full work available at URL https://arxiv.org/abs/1605.01243

zbMATH Keywords

asymptotic expansionMalliavin calculusoption pricingstochastic differential equationsstochastic volatility modelsweak approximationexpectationsKusuoka schemeWatanabe theory

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic calculus of variations and the Malliavin calculus (60H07) Numerical methods (including Monte Carlo methods) (91G60) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to stochastic differential and integral equations (65C30) Financial applications of other theories (91G80)

Abstract: This paper develops a new efficient scheme for approximations of expectations of the solutions to stochastic differential equations (SDEs). In particular, we present a method for connecting approximate operators based on an asymptotic expansion with multidimensional Malliavin weights to compute a target expectation value precisely. The mathematical validity is given based on Watanabe and Kusuoka theories in Malliavin calculus. Moreover, numerical experiments for option pricing under local and stochastic volatility models confirm the effectiveness of our scheme. Especially, our weak approximation substantially improves the accuracy at deep Out-of-The-Moneys (OTMs).

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Cited in

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• A control variate method for weak approximation of SDEs via discretization of numerical error of asymptotic expansion
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• A second-order discretization for forward-backward SDEs using local approximations with Malliavin calculus
• New asymptotic expansion formula via Malliavin calculus and its application to rough differential equation driven by fractional Brownian motion
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• Solving Kolmogorov PDEs without the curse of dimensionality via deep learning and asymptotic expansion with Malliavin calculus
• Acceleration of automatic differentiation of solutions to parabolic partial differential equations: a higher order discretization
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• Solving backward stochastic differential equations with quadratic-growth drivers by connecting the short-term expansions
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• Weak approximation of SDEs for tempered distributions and applications
• A high order weak approximation for jump-diffusions using Malliavin calculus and operator splitting
• Weak Approximation of Stochastic Differential Equations and Application to Derivative Pricing
• Total variation bound for Milstein scheme without iterated integrals

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