Random walk algorithm for the Dirichlet problem for parabolic integro-differential equation
Abstract
We consider stochastic differential equations driven by a general L\'evy processes (SDEs) with infinite activity and the related, via the Feynman-Kac formula, Dirichlet problem for parabolic integro-differential equation (PIDE). We approximate the solution of PIDE using a numerical method for the SDEs. The method is based on three ingredients: (i) we approximate small jumps by a diffusion; (ii) we use restricted jump-adaptive time-stepping; and (iii) between the jumps we exploit a weak Euler approximation. We prove weak convergence of the considered algorithm and present an in-depth analysis of how its error and computational cost depend on the jump activity level. Results of some numerical experiments, including pricing of barrier basket currency options, are presented.
Cite
@article{arxiv.2001.05531,
title = {Random walk algorithm for the Dirichlet problem for parabolic integro-differential equation},
author = {G. Deligiannidis and S. Maurer and M. V. Tretyakov},
journal= {arXiv preprint arXiv:2001.05531},
year = {2021}
}