Simulation of volatility modulated Volterra processes using hyperbolic stochastic partial differential equations
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.
Cite
@article{arxiv.1602.02907,
title = {Simulation of volatility modulated Volterra processes using hyperbolic stochastic partial differential equations},
author = {Fred Espen Benth and Heidar Eyjolfsson},
journal= {arXiv preprint arXiv:1602.02907},
year = {2016}
}
Comments
Published at http://dx.doi.org/10.3150/14-BEJ675 in the Bernoulli (http://isi.cbs.nl/bernoulli/) by the International Statistical Institute/Bernoulli Society (http://isi.cbs.nl/BS/bshome.htm)