Recursive marginal quantization of higher-order schemes

DOI10.1080/14697688.2017.1402125zbMATH Open1400.91604arXiv1701.02681OpenAlexW2578428697MaRDI QIDQ4554449FDOQ4554449

Authors: Thomas Andrew McWalter, J. Kienitz, Eckhard Platen, Robert E. Rudd 

Publication date: 14 November 2018

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: Quantization techniques have been applied in many challenging finance applications, including pricing claims with path dependence and early exercise features, stochastic optimal control, filtering problems and efficient calibration of large derivative books. Recursive Marginal Quantization of the Euler scheme has recently been proposed as an efficient numerical method for evaluating functionals of solutions of stochastic differential equations. This method involves recursively quantizing the conditional marginals of the discrete-time Euler approximation of the underlying process. By generalizing this approach, we show that it is possible to perform recursive marginal quantization for two higher-order schemes: the Milstein scheme and a simplified weak order 2.0 scheme. As part of this generalization a simple matrix formulation is presented, allowing efficient implementation. We further extend the applicability of recursive marginal quantization by showing how absorption and reflection at the zero boundary may be incorporated, when this is necessary. To illustrate the improved accuracy of the higher order schemes, various computations are performed using geometric Brownian motion and its generalization, the constant elasticity of variance model. For both processes, we show numerical evidence of improved weak order convergence and we compare the marginal distributions implied by the three schemes to the known analytical distributions. By pricing European, Bermudan and Barrier options, further evidence of improved accuracy of the higher order schemes is demonstrated.

Full work available at URL: https://arxiv.org/abs/1701.02681

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zbMATH Keywords

truncationEuler schemeMilstein schemereflectionvector quantizationrecursive marginal quantizationweak order 2.0 scheme

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

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Cited In (10)

• Conic quantization: stochastic volatility and market implied liquidity
• A fully quantization-based scheme for FBSDEs
• Stationary Heston model: calibration and pricing of exotics using product recursive quantization
• Quantization meets Fourier: a new technology for pricing options
• Quantization goes polynomial
• Weak and strong error analysis of recursive quantization: a general approach with an application to jump diffusions
• New weak error bounds and expansions for optimal quantization
• Numerical methods for backward stochastic differential equations: a survey
• Quantization methods for stochastic differential equations
• Recursive marginal quantization of the Euler scheme of a diffusion process

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