8,843 research outputs found
Explicit Mean-Square Error Bounds for Monte-Carlo and Linear Stochastic Approximation
This paper concerns error bounds for recursive equations subject to Markovian
disturbances. Motivating examples abound within the fields of Markov chain
Monte Carlo (MCMC) and Reinforcement Learning (RL), and many of these
algorithms can be interpreted as special cases of stochastic approximation
(SA). It is argued that it is not possible in general to obtain a Hoeffding
bound on the error sequence, even when the underlying Markov chain is
reversible and geometrically ergodic, such as the M/M/1 queue. This is
motivation for the focus on mean square error bounds for parameter estimates.
It is shown that mean square error achieves the optimal rate of ,
subject to conditions on the step-size sequence. Moreover, the exact constants
in the rate are obtained, which is of great value in algorithm design
Convergence of numerical methods for stochastic differential equations in mathematical finance
Many stochastic differential equations that occur in financial modelling do
not satisfy the standard assumptions made in convergence proofs of numerical
schemes that are given in textbooks, i.e., their coefficients and the
corresponding derivatives appearing in the proofs are not uniformly bounded and
hence, in particular, not globally Lipschitz. Specific examples are the Heston
and Cox-Ingersoll-Ross models with square root coefficients and the Ait-Sahalia
model with rational coefficient functions. Simple examples show that, for
example, the Euler-Maruyama scheme may not converge either in the strong or
weak sense when the standard assumptions do not hold. Nevertheless, new
convergence results have been obtained recently for many such models in
financial mathematics. These are reviewed here. Although weak convergence is of
traditional importance in financial mathematics with its emphasis on
expectations of functionals of the solutions, strong convergence plays a
crucial role in Multi Level Monte Carlo methods, so it and also pathwise
convergence will be considered along with methods which preserve the positivity
of the solutions.Comment: Review Pape
Strong convergence of an explicit numerical method for SDEs with nonglobally Lipschitz continuous coefficients
On the one hand, the explicit Euler scheme fails to converge strongly to the
exact solution of a stochastic differential equation (SDE) with a superlinearly
growing and globally one-sided Lipschitz continuous drift coefficient. On the
other hand, the implicit Euler scheme is known to converge strongly to the
exact solution of such an SDE. Implementations of the implicit Euler scheme,
however, require additional computational effort. In this article we therefore
propose an explicit and easily implementable numerical method for such an SDE
and show that this method converges strongly with the standard order one-half
to the exact solution of the SDE. Simulations reveal that this explicit
strongly convergent numerical scheme is considerably faster than the implicit
Euler scheme.Comment: Published in at http://dx.doi.org/10.1214/11-AAP803 the Annals of
Applied Probability (http://www.imstat.org/aap/) by the Institute of
Mathematical Statistics (http://www.imstat.org
Strong convergence rates for Euler approximations to a class of stochastic path-dependent volatility models
We consider a class of stochastic path-dependent volatility models where the
stochastic volatility, whose square follows the Cox-Ingersoll-Ross model, is
multiplied by a (leverage) function of the spot price, its running maximum, and
time. We propose a Monte Carlo simulation scheme which combines a log-Euler
scheme for the spot process with the full truncation Euler scheme or the
backward Euler-Maruyama scheme for the squared stochastic volatility component.
Under some mild regularity assumptions and a condition on the Feller ratio, we
establish the strong convergence with order 1/2 (up to a logarithmic factor) of
the approximation process up to a critical time. The model studied in this
paper contains as special cases Heston-type stochastic-local volatility models,
the state-of-the-art in derivative pricing, and a relatively new class of
path-dependent volatility models. The present paper is the first to prove the
convergence of the popular Euler schemes with a positive rate, which is
moreover consistent with that for Lipschitz coefficients and hence optimal.Comment: 34 pages, 5 figure
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