Rare event simulation for processes generated via stochastic fixed point equations

DOI10.1214/13-AAP974MaRDI QIDQ744388zbMATHFDO

Authors Jeffrey F. Collamore, Guoqing Diao, Anand N. Vidyashankar

Publication date 25 September 2014

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

Full work available at URL https://arxiv.org/abs/1107.3284

zbMATH Keywords

importance samplinglarge deviationfinancial time seriesMonte Carlo methodsrisk theoryregeneration timesARCH processeslast exit timesnonlinear renewal theoryfirst entrance timesHarris recurrent Markov chainsruin theory with stochastic invesments

Mathematics Subject Classification ID

Computational methods in Markov chains (60J22) Monte Carlo methods (65C05) Numerical analysis or methods applied to Markov chains (65C40) Large deviations (60F10) Economic time series analysis (91B84) Numerical methods (including Monte Carlo methods) (91G60) Markov chains (discrete-time Markov processes on discrete state spaces) (60J10) Discrete-time Markov processes on general state spaces (60J05) Markov renewal processes, semi-Markov processes (60K15) Stopping times; optimal stopping problems; gambling theory (60G40) Random operators and equations (aspects of stochastic analysis) (60H25)

Abstract: In a number of applications, particularly in financial and actuarial mathematics, it is of interest to characterize the tail distribution of a random variable $V$ satisfying the distributional equation $VstackrelmathcalD=f(V)$, where $f(v)=Amaxv,D+B$ for $(A,B,D)in(0,infty)imes{mathbbR}^2$. This paper is concerned with computational methods for evaluating these tail probabilities. We introduce a novel importance sampling algorithm, involving an exponential shift over a random time interval, for estimating these rare event probabilities. We prove that the proposed estimator is: (i) consistent, (ii) strongly efficient and (iii) optimal within a wide class of dynamic importance sampling estimators. Moreover, using extensions of ideas from nonlinear renewal theory, we provide a precise description of the running time of the algorithm. To establish these results, we develop new techniques concerning the convergence of moments of stopped perpetuity sequences, and the first entrance and last exit times of associated Markov chains on $mathbbR$. We illustrate our methods with a variety of numerical examples which demonstrate the ease and scope of the implementation.

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Cited in

(17)

• Discovery of rare event testing for stochastic simulations of diffusion processes
• On the Kesten-Goldie constant
• Large excursions and conditioned laws for recursive sequences generated by random matrices
• Analysis and simulation of rare events for SPDEs
• Density approximation and exact simulation of random variables that are solutions of fixed-point equations
• Large deviation tail estimates and related limit laws for stochastic fixed point equations
• Importance sampling for maxima on trees
• A Koopman framework for rare event simulation in stochastic differential equations
• Convergence of the population dynamics algorithm in the Wasserstein metric
• Rare-event simulation for stochastic recurrence equations with heavy-tailed innovations
• Limit theory and robust evaluation methods for the extremal properties of GARCH\((p,q)\) processes
• Importance sampling of heavy-tailed iterated random functions
• Importance sampling approximations to various probabilities of ruin of spectrally negative Lévy risk processes
• Simulation and estimation of extreme quantiles and extreme probabilities
• Efficient rare-event simulation for perpetuities
• Rare event simulation for steady-state probabilities via recurrency cycles
• Tail estimates for stochastic fixed point equations via nonlinear renewal theory

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