Convergence, nonnegativity and stability of a new Milstein scheme with applications to finance

DOI10.3934/DCDSB.2013.18.2083zbMATH Open1279.60068arXiv1204.1647OpenAlexW2022278178MaRDI QIDQ379049FDOQ379049

Authors: Desmond J. Higham, Xuerong Mao, Lukasz Szpruch 

Publication date: 12 November 2013

Published in: Discrete and Continuous Dynamical Systems. Series B (Search for Journal in Brave)

Abstract: We propose and analyse a new Milstein type scheme for simulating stochastic differential equations (SDEs) with highly nonlinear coefficients. Our work is motivated by the need to justify multi-level Monte Carlo simulations for mean-reverting financial models with polynomial growth in the diffusion term. We introduce a double implicit Milstein scheme and show that it possesses desirable properties. It converges strongly and preserves non-negativity for a rich family of financial models and can reproduce linear and nonlinear stability behaviour of the underlying SDE without severe restriction on the time step. Although the scheme is implicit, we point out examples of financial models where an explicit formula for the solution to the scheme can be found.

Full work available at URL: https://arxiv.org/abs/1204.1647

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zbMATH Keywords

stabilityMilstein schemestrong convergencenonnegativityimplicit schemes stochastic differential equation

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to equations with nonlinear operators (65J15)

Cited In (51)

• Stochastic C-stability and B-consistency of explicit and implicit Milstein-type schemes
• Highly nonlinear model in finance and convergence of Monte Carlo simulations
• Invariant measures of the Milstein method for stochastic differential equations with commutative noise
• A positivity preserving Milstein-type method for stochastic differential equations with positive solutions
• Convergence of numerical methods for stochastic differential equations in mathematical finance
• The implementation of Milstein scheme in two-dimensional SDEs using non-degeneracy for the diffusion term
• High-order split-step theta methods for non-autonomous stochastic differential equations with non-globally Lipschitz continuous coefficients
• Approximation of non-Lipschitz SDEs by Picard iterations
• Numerical analysis of the balanced implicit method for stochastic age-dependent capital system with Poisson jumps
• Optimal strong convergence rate of a backward Euler type scheme for the Cox-Ingersoll-Ross model driven by fractional Brownian motion
• Convergence Rates of Split-Step Theta Methods for SDEs with Non-Globally Lipschitz Diffusion Coefficients
• Strong convergence rate of implicit Euler scheme to a CIR model with delay
• Positivity-preserving truncated Euler-Maruyama method for generalised Ait-Sahalia-type interest model
• Convergence and non-negativity preserving of the solution of balanced method for the delay CIR model with jump
• Strong convergence of an adaptive time-stepping Milstein method for SDEs with monotone coefficients
• The positive numerical solution for stochastic age-dependent capital system based on explicit-implicit algorithm
• Stability analysis of stochastic delay differential equations with Markovian switching driven by Lévy noise
• Split-step theta Milstein methods for SDEs with non-globally Lipschitz diffusion coefficients
• Exponential integrability properties of numerical approximation processes for nonlinear stochastic differential equations
• Convergence, non-negativity and stability of a new lobatto IIIC-Milstein method for a pricing option approach based on stochastic volatility model
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• Strong convergence of a GBM based tamed integrator for SDEs and an adaptive implementation
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• Analysis of non-negativity and convergence of solution of the balanced implicit method for the delay Cox-Ingersoll-Ross model
• An explicit positivity-preserving scheme for the Heston 3/2-model with order-one strong convergence
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• Construction of positivity preserving numerical method for jump-diffusion option pricing models
• A transformed jump-adapted backward Euler method for jump-extended CIR and CEV models
• Convergence and stability of two classes of theta-Milstein schemes for stochastic differential equations
• A positivity-preserving numerical algorithm for stochastic age-dependent population system with Lévy noise in a polluted environment
• Construction of positivity preserving numerical method for stochastic age-dependent population equations
• Double-implicit and split two-step Milstein schemes for stochastic differential equations
• Linear implicit approximations of invariant measures of semi-linear SDEs with non-globally Lipschitz coefficients
• Strong and weak convergence rates of logarithmic transformed truncated EM methods for SDEs with positive solutions
• Exponential mean-square stability of the improved split-step theta methods for non-autonomous stochastic differential equations
• Study on split-step Rosenbrock type method for stiff stochastic differential systems
• Positivity preserving logarithmic Euler-Maruyama type scheme for stochastic differential equations
• Positivity preserving stochastic \(\theta\)-methods for selected SDEs
• Implicit Milstein method for stochastic differential equations via the Wong-Zakai approximation
• Positivity-preserving numerical schemes for stochastic differential equations
• Strong convergence for Euler-Maruyama and Milstein schemes with asymptotic method
• Construction of positivity-preserving numerical method for stochastic SIVS epidemic model
• Convergence and stability of the Milstein scheme for stochastic differential equations with piecewise continuous arguments
• Stability of the drift-implicit and double-implicit Milstein schemes for nonlinear SDEs

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