Runge-Kutta methods for third order weak approximation of SDEs with multidimensional additive noise

A new class of third order Runge-Kutta methods for stochastic differential equations with additive noise is introduced. In contrast to Platen's method, which to the knowledge of the author has been up to now the only known third order Runge-Kutta scheme for weak approximation, the new class of methods affords less random variable evaluations and is also applicable to SDEs with multidimensional noise. Order conditions up to order three are calculated and coefficients of a four stage third order method are given. This method has deterministic order four and minimized error constants, and needs in addition less function evaluations than the method of Platen. Applied to some examples, the new method is compared numerically with Platen's method and some well known second order methods and yields very promising results.Comment: Two further examples added, small correction

Stochastic Calculus for a Time-changed Semimartingale and the Associated Stochastic Differential Equations

It is shown that under a certain condition on a semimartingale and a time-change, any stochastic integral driven by the time-changed semimartingale is a time-changed stochastic integral driven by the original semimartingale. As a direct consequence, a specialized form of the Ito formula is derived. When a standard Brownian motion is the original semimartingale, classical Ito stochastic differential equations driven by the Brownian motion with drift extend to a larger class of stochastic differential equations involving a time-change with continuous paths. A form of the general solution of linear equations in this new class is established, followed by consideration of some examples analogous to the classical equations. Through these examples, each coefficient of the stochastic differential equations in the new class is given meaning. The new feature is the coexistence of a usual drift term along with a term related to the time-change.Comment: 27 pages; typos correcte

On inversions and Doob hh-transforms of linear diffusions

Let $X$ be a regular linear diffusion whose state space is an open interval $E\subseteq\mathbb{R}$. We consider a diffusion $X^*$ which probability law is obtained as a Doob $h$-transform of the law of $X$, where $h$ is a positive harmonic function for the infinitesimal generator of $X$ on $E$. This is the dual of $X$ with respect to $h(x)m(dx)$ where $m(dx)$ is the speed measure of $X$. Examples include the case where $X^*$ is $X$ conditioned to stay above some fixed level. We provide a construction of $X^*$ as a deterministic inversion of $X$, time changed with some random clock. The study involves the construction of some inversions which generalize the Euclidean inversions. Brownian motion with drift and Bessel processes are considered in details.Comment: 19 page

G-Brownian Motion as Rough Paths and Differential Equations Driven by G-Brownian Motion

The present paper is devoted to the study of sample paths of G-Brownian motion and stochastic differential equations (SDEs) driven by G-Brownian motion from the view of rough path theory. As the starting point, we show that quasi-surely, sample paths of G-Brownian motion can be enhanced to the second level in a canonical way so that they become geometric rough paths of roughness 2 < p < 3. This result enables us to introduce the notion of rough differential equations (RDEs) driven by G-Brownian motion in the pathwise sense under the general framework of rough paths. Next we establish the fundamental relation between SDEs and RDEs driven by G-Brownian motion. As an application, we introduce the notion of SDEs on a differentiable manifold driven by GBrownian motion and construct solutions from the RDE point of view by using pathwise localization technique. This is the starting point of introducing G-Brownian motion on a Riemannian manifold, based on the idea of Eells-Elworthy-Malliavin. The last part of this paper is devoted to such construction for a wide and interesting class of G-functions whose invariant group is the orthogonal group. We also develop the Euler-Maruyama approximation for SDEs driven by G-Brownian motion of independent interest

CONVERGENCE OF AMERICAN OPTION VALUES FROM DISCRETE- TO CONTINUOUS-TIME FINANCIAL MODELS 1

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/75553/1/j.1467-9965.1994.tb00059.x.pd

On arbitrages arising from honest times

In the context of a general continuous financial market model, we study whether the additional information associated with an honest time gives rise to arbitrage profits. By relying on the theory of progressive enlargement of filtrations, we explicitly show that no kind of arbitrage profit can ever be realised strictly before an honest time, while classical arbitrage opportunities can be realised exactly at an honest time as well as after an honest time. Moreover, stronger arbitrages of the first kind can only be obtained by trading as soon as an honest time occurs. We carefully study the behavior of local martingale deflators and consider no-arbitrage-type conditions weaker than NFLVR.Comment: 25 pages, revised versio

Martingale Models for Quantum State Reduction

Stochastic models for quantum state reduction give rise to statistical laws that are in most respects in agreement with those of quantum measurement theory. Here we examine the correspondence of the two theories in detail, making a systematic use of the methods of martingale theory. An analysis is carried out to determine the magnitude of the fluctuations experienced by the expectation of the observable during the course of the reduction process and an upper bound is established for the ensemble average of the greatest fluctuations incurred. We consider the general projection postulate of L\"uders applicable in the case of a possibly degenerate eigenvalue spectrum, and derive this result rigorously from the underlying stochastic dynamics for state reduction in the case of both a pure and a mixed initial state. We also analyse the associated Lindblad equation for the evolution of the density matrix, and obtain an exact time-dependent solution for the state reduction that explicitly exhibits the transition from a general initial density matrix to the L\"uders density matrix. Finally, we apply Girsanov's theorem to derive a set of simple formulae for the dynamics of the state in terms of a family of geometric Brownian motions, thereby constructing an explicit unravelling of the Lindblad equation.Comment: 30 pages LaTeX. Submitted to Journal of Physics

LERW as an example of off-critical SLEs

Two dimensional loop erased random walk (LERW) is a random curve, whose continuum limit is known to be a Schramm-Loewner evolution (SLE) with parameter kappa=2. In this article we study ``off-critical loop erased random walks'', loop erasures of random walks penalized by their number of steps. On one hand we are able to identify counterparts for some LERW observables in terms of symplectic fermions (c=-2), thus making further steps towards a field theoretic description of LERWs. On the other hand, we show that it is possible to understand the Loewner driving function of the continuum limit of off-critical LERWs, thus providing an example of application of SLE-like techniques to models near their critical point. Such a description is bound to be quite complicated because outside the critical point one has a finite correlation length and therefore no conformal invariance. However, the example here shows the question need not be intractable. We will present the results with emphasis on general features that can be expected to be true in other off-critical models.Comment: 45 pages, 2 figure

Optimal Investment-Consumption Problem with Constraint

In this paper, we consider an optimal investment-consumption problem subject to a closed convex constraint. In the problem, a constraint is imposed on both the investment and the consumption strategy, rather than just on the investment. The existence of solution is established by using the Martingale technique and convex duality. In addition to investment, our technique embeds also the consumption into a family of fictitious markets. However, with the addition of consumption, it leads to nonreflexive dual spaces. This difficulty is overcome by employing the so-called technique of \relaxation-projection" to establish the existence of solution to the problem. Furthermore, if the solution to the dual problem is obtained, then the solution to the primal problem can be found by using the characterization of the solution. An illustrative example is given with a dynamic risk constraint to demonstrate the method