Stopped diffusion processes: boundary corrections and overshoot

Emmanuel Gobet (1) , Stéphane Menozzi (2)

1 MATHFI - Mathématiques financières
2 LPMA - Laboratoire de Probabilités et Modèles Aléatoires

For a stopped diffusion process in a multidimensional time-dependent domain $D$, we propose and analyse a new procedure consisting in simulating the process with an Euler scheme with step size $\Delta$ and stopping it at discrete times $(i\Delta)_{i\in N^*}$ in a modified domain, whose boundary has been appropriately shifted. The shift is locally in the direction of the inward normal $n(t,x)$ at any point $(t,x)$ on the parabolic boundary of $D$, and its amplitude is equal to $0.5826 (...) |n^*\sigma|(t,x)\sqrt \Delta$ where $\sigma$ stands for the diffusion coefficient of the process. The procedure is thus extremely easy to use. In addition, we prove that the rate of convergence w.r.t. $\Delta$ for the associated weak error is higher than without shifting, generalizing previous results by \cite{broa:glas:kou:97} obtained for the one dimensional Brownian motion. For this, we establish in full generality the asymptotics of the triplet exit time/exit position/overshoot for the discretely stopped Euler scheme. Here, the overshoot means the distance to the boundary of the process when it exits the domain. Numerical experiments support these results.

Mots clés: Boundary sensitivity; Brownian overshoot; Stopped diffusion; Time dependent domain

Domaines: Probabilités [math.PR]

Emmanuel Gobet, Stéphane Menozzi. Stopped diffusion processes: boundary corrections and overshoot. Stochastic Processes and their Applications, 2010, 120 (2), pp.130-162. ⟨10.1016/j.spa.2009.09.014⟩. ⟨hal-00157975v3⟩