Convergence rate of Markov chains and hybrid numerical schemes to jump-diffusion with application to the Bates model

DOI10.1137/18M1209416MaRDI QIDQ5151932zbMATH OpenOpenAlexFDO

Authors Maya Briani, Lucia Caramellino, Giulia Terenzi

Publication date 23 February 2021

Published in SIAM Journal on Numerical Analysis (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1809.10545

zbMATH Keywords

European optionsfinite differencejump-diffusion processesPIDESstochastic volatilitytree methodsweak convergence

Mathematics Subject Classification ID

Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Probabilistic models, generic numerical methods in probability and statistics (65C20) Numerical analysis or methods applied to Markov chains (65C40) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We study the rate of weak convergence of Markov chains to diffusion processes under suitable but quite general assumptions. We give an example in the financial framework, applying the convergence analysis to a multiple jumps tree approximation of the CIR process. Then, we combine the Markov chain approach with other numerical techniques in order to handle the different components in jump-diffusion coupled models. We study the speed of convergence of this hybrid approach and we provide an example in finance, applying our results to a tree-finite difference approximation in the Heston or Bates model.

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Cited in

(3)

• Numerical stability of a hybrid method for pricing options
• High order approximations and simulation schemes for the log-Heston process
• Reinforcement Q-learning algorithm for H _∞ tracking control of discrete-time Markov jump systems

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