Recursive marginal quantization of an Euler scheme with applications to local volatility models
Résumé
We propose a new approach to quantize the marginals of the discrete Euler diffusion process. The method is built recursively and involes the conditional distribution of the marginals of the discrete Euler process. Analytically, the method raises several questions like the analysis of the induced quadratic quantization error between the marginals of the Euler process and the proposed quantizations. We show in particular that at every discretization step $t_k$ of the Euler scheme, this error is bounded by the cumulative quantization errors induced by the Euler operator, from times $t_0=0$ to time $t_k$. For numerics, we restrict our analysis to the one dimensional setting and show how to compute the optimal grids using a Newton-Raphson algorithm. We then propose a close formula for the companion weights and the transition probabilities associated to the proposed quantizations. This allows us to quantize in particular diffusion processes in local volatility models by reducing dramatically the computational complexity of the search of optimal quantizers while increasing their computational precision with respect to the algorithms commonly proposed in this framework. Numerical tests are carried out for the Brownian motion and for the pricing of European options in a local volatility model. A comparison with the Monte Carlo simulations shows that the proposed method is more efficient (w.r.t. both computational precision and time complexity) than the Monte Carlo method.
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