Wong--Zakai approximations with convergence rate for stochastic differential equations with regime switching

arXiv2101.03250MaRDI QIDQ6357873FDOQ6357873

Giang T. Nguyen, Oscar Peralta

Publication date: 8 January 2021

Abstract: We construct Wong--Zakai approximations of time--inhomogeneous stochastic differential equations with regime switching (RSSDEs), and provide a convergence rate. %Given a family of finite-variation processes ${mathcal{F}^{lambda}}_{lambdage0}$ that converge strongly to a standard Brownian motion $mathcalB$, we construct pathwise approximations for regime-switching, time-inhomogeneous stochastic differential equations in the Wong-Zakai sense. Moreover, we determine the rate of strong convergence to the solutions of such regime-switching SDEs, showing that this rate is almost as good as that of ${mathcal{F}^{lambda}}_{lambdage0}$ to $mathcalB$. In the proposed approximations, the standard Brownian motion driving the time-inhomogeneous RSSDEs is replaced by a family of finite--variation processes ${mathcal{F}^{lambda}}_{lambda>0}$. We show that if $mathcal{F}^{lambda}$ strongly converges to $mathcalB$ at rate $delta(lambda)$, then the Wong--Zakai approximation strongly converges to the original solution of the time--inhomogeneous RSSDE at rate $delta(lambda)lambd{a}^{varepsilon}$, for any $varepsilon>0$. This is the first paper on Wong--Zakai approximations for time--inhomogeneous RSSDEs, and significantly extends the counterparts for time--homogeneous SDEs without regime switching in R"{o}misch and Wakolbinger (1985).

Mathematics Subject Classification ID

Applications of continuous-time Markov processes on discrete state spaces (60J28) Brownian motion (60J65) Rate of convergence, degree of approximation (41A25)

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