Recursive marginal quantization of the Euler scheme of a diffusion process

DOI10.1080/1350486X.2015.1091741MaRDI QIDQ4682490zbMATH OpenFDO

Authors Gilles Pagès, Abass Sagna

Publication date 18 September 2018

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1304.2531

zbMATH Keywords

Euler schemelocal volatilityoptimal quantizationrecursive marginal quantization

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Diffusion processes (60J60) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35)

Abstract: We propose a new approach to quantize the marginals of the discrete Euler diffusion process. The method is built recursively and involves the conditional distribution of the marginals of the discrete Euler process. Analytically, the method raises several questions like the analysis of the induced quadratic quantization error between the marginals of the Euler process and the proposed quantizations. We show in particular that at every discretization step $t_k$ of the Euler scheme, this error is bounded by the cumulative quantization errors induced by the Euler operator, from times $t_0=0$ to time $t_k$. For numerics, we restrict our analysis to the one dimensional setting and show how to compute the optimal grids using a Newton-Raphson algorithm. We then propose a closed formula for the companion weights and the transition probabilities associated to the proposed quantizations. This allows us to quantize in particular diffusion processes in local volatility models by reducing dramatically the computational complexity of the search of optimal quantizers while increasing their computational precision with respect to the algorithms commonly proposed in this framework. Numerical tests are carried out for the Brownian motion and for the pricing of European options in a local volatility model. A comparison with the Monte Carlo simulations shows that the proposed method may sometimes be more efficient (w.r.t. both computational precision and time complexity) than the Monte Carlo method.

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Cited in

(16)

• Convex order, quantization and monotone approximations of ARCH models
• Conic quantization: stochastic volatility and market implied liquidity
• A fully quantization-based scheme for FBSDEs
• Pricing via recursive quantization in stochastic volatility models
• Product Markovian quantization of a diffusion process with applications to finance
• Quantization of stochastic volatility models: numerical tests and an open source implementation
• Approximation of quantiles of components of diffusion processes.
• Stationary Heston model: calibration and pricing of exotics using product recursive quantization
• Recursive marginal quantization of higher-order schemes
• 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
• A backward Monte Carlo approach to exotic option pricing
• Quantiles of the Euler Scheme for Diffusion Processes and Financial Applications
• Quantization methods for stochastic differential equations
• On randomization of affine diffusion processes with application to pricing of options on VIX and S\&P 500

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