Markov chain Monte Carlo for exact inference for diffusions

We develop exact Markov chain Monte Carlo methods for discretely-sampled, directly and indirectly observed diffusions. The qualification "exact" refers to the fact that the invariant and limiting distribution of the Markov chains is the posterior distribution of the parameters free of any discretisation error. The class of processes to which our methods directly apply are those which can be simulated using the most general to date exact simulation algorithm. The article introduces various methods to boost the performance of the basic scheme, including reparametrisations and auxiliary Poisson sampling. We contrast both theoretically and empirically how this new approach compares to irreducible high frequency imputation, which is the state-of-the-art alternative for the class of processes we consider, and we uncover intriguing connections. All methods discussed in the article are tested on typical examples.Comment: 23 pages, 6 Figures, 3 Table

Simulation of diffusions by means of importance sampling paradigm

The aim of this paper is to introduce a new Monte Carlo method based on importance sampling techniques for the simulation of stochastic differential equations. The main idea is to combine random walk on squares or rectangles methods with importance sampling techniques. The first interest of this approach is that the weights can be easily computed from the density of the one-dimensional Brownian motion. Compared to the Euler scheme this method allows one to obtain a more accurate approximation of diffusions when one has to consider complex boundary conditions. The method provides also an interesting alternative to performing variance reduction techniques and simulating rare events.Comment: Published in at http://dx.doi.org/10.1214/09-AAP659 the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

Statistical Romberg extrapolation: A new variance reduction method and applications to option pricing

We study the approximation of $\mathbb{E}f(X_T)$ by a Monte Carlo algorithm, where $X$ is the solution of a stochastic differential equation and $f$ is a given function. We introduce a new variance reduction method, which can be viewed as a statistical analogue of Romberg extrapolation method. Namely, we use two Euler schemes with steps $\delta$ and $\delta^{\beta},0<\beta<1$. This leads to an algorithm which, for a given level of the statistical error, has a complexity significantly lower than the complexity of the standard Monte Carlo method. We analyze the asymptotic error of this algorithm in the context of general (possibly degenerate) diffusions. In order to find the optimal $\beta$ (which turns out to be $\beta=1/2$), we establish a central limit type theorem, based on a result of Jacod and Protter for the asymptotic distribution of the error in the Euler scheme. We test our method on various examples. In particular, we adapt it to Asian options. In this setting, we have a CLT and, as a by-product, an explicit expansion of the discretization error.Comment: Published at http://dx.doi.org/10.1214/105051605000000511 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

Spatial Smoothing for Diffusion Tensor Imaging with low Signal to Noise Ratios

Though low signal to noise ratio (SNR) experiments in DTI give key information about tracking and anisotropy, e.g. by measurements with very small voxel sizes, due to the complicated impact of thermal noise such experiments are up to now seldom analysed. In this paper Monte Carlo simulations are presented which investigate the random fields of noise for different DTI variables in low SNR situations. Based on this study a strategy for spatial smoothing, which demands essentially uniform noise, is derived. To construct a convenient filter the weights of the nonlinear Aurich chain are adapted to DTI. This edge preserving three dimensional filter is then validated in different variants via a quasi realistic model and is applied to very new data with isotropic voxels of the size 1x1x1 mm3 which correspond to a spatial mean SNR of approximately 3

A selective overview of nonparametric methods in financial econometrics

This paper gives a brief overview on the nonparametric techniques that are useful for financial econometric problems. The problems include estimation and inferences of instantaneous returns and volatility functions of time-homogeneous and time-dependent diffusion processes, and estimation of transition densities and state price densities. We first briefly describe the problems and then outline main techniques and main results. Some useful probabilistic aspects of diffusion processes are also briefly summarized to facilitate our presentation and applications.Comment: 32 pages include 7 figure

Joint Modelling of Gas and Electricity spot prices

The recent liberalization of the electricity and gas markets has resulted in the growth of energy exchanges and modelling problems. In this paper, we modelize jointly gas and electricity spot prices using a mean-reverting model which fits the correlations structures for the two commodities. The dynamics are based on Ornstein processes with parameterized diffusion coefficients. Moreover, using the empirical distributions of the spot prices, we derive a class of such parameterized diffusions which captures the most salient statistical properties: stationarity, spikes and heavy-tailed distributions. The associated calibration procedure is based on standard and efficient statistical tools. We calibrate the model on French market for electricity and on UK market for gas, and then simulate some trajectories which reproduce well the observed prices behavior. Finally, we illustrate the importance of the correlation structure and of the presence of spikes by measuring the risk on a power plant portfolio

Marginalization for rare event simulation in switching diffusions

In this paper we use splitting technique to estimate the probability of hitting a rare but critical set by the continuous component of a switching diffusion. Instead of following classical approach we use Wonham filter to achieve multiple goals including reduction of asymptotic variance and exemption from sampling the discrete components