Simulation of volatility modulated Volterra processes using hyperbolic stochastic partial differential equations

DOI10.3150/14-BEJ675MaRDI QIDQ265269zbMATHOpenAlexFDO

Authors Fred Espen Benth, Heidar Eyjolfsson

Publication date 1 April 2016

Published in Bernoulli (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1602.02907

zbMATH Keywords

finite difference schemehyperbolic stochastic partial differential equationsvolatility modulated Volterra processessemistationary Lévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to stochastic differential and integral equations (65C30) Financial applications of other theories (91G80)

Abstract: We propose a finite difference scheme to simulate solutions to a certain type of hyperbolic stochastic partial differential equation (HSPDE). These solutions can in turn estimate so called volatility modulated Volterra (VMV) processes and L'{e}vy semistationary (LSS) processes, which is a class of processes that have been employed to model turbulence, tumor growth and electricity forward and spot prices. We will see that our finite difference scheme converges to the solution of the HSPDE as we take finer and finer partitions for our finite difference scheme in both time and space. Finally, we demonstrate our method with an example from the energy finance literature.

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Cites work

• Ambit processes and stochastic partial differential equations
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Cited in

(1)

• Stochastic Volterra integral equations and a class of first-order stochastic partial differential equations

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