NDLI: Change of measure for the square-root process

Content Provider	IEEE Xplore Digital Library
Author	Dufresne, Daniel Vazquez-Abad, Felisa Chin, Stephen
Copyright Year	2014
Description	Author affiliation: Centre for Actuarial Studies, University of Melbourne, 111 Barry Street, Carlton VIC 3053, AUSTRALIA (Dufresne, Daniel) \|\| Department of Computer Science, Hunter College CUNY, 695 Park ave, New York 10021, USA (Vazquez-Abad, Felisa) \|\| Ingensoma Arbitrage Ltd, Hanwha Securities Bldg 22F, 23-5 Youngdeungpo-gu, Seoul, KOREA, 150-717 (Chin, Stephen)
Abstract	The square-root process is used to model interest rates and volatility in financial mathematics. The pricing of derivatives involving that process often requires simulating it, since there are often no explicit formulas for prices. We study how a change of measure (CM) may improve those simulations. We compare with Andersen's quadratic-exponential scheme (QE), which so far appears to be the most efficient technique to simulate the stochastic differential equation satisfied by the square-root process. An integer-dimension squared Bessel process, easy to simulate, is used to generate the law of the square-root process using a change of measure. The new method performs very well, and the two algorithms execute at similar speeds; however, CM is slower than QE if random number generation is taken into account, because CM requires more random numbers. The Radon-Nikodym derivative sometimes has a rather intriguing behavior, which is itself of interest. We propose an explanation.
Starting Page	465
Ending Page	475
File Size	130696
Page Count	11
File Format	PDF
e-ISBN	9781479974863
DOI	10.1109/WSC.2014.7019912
Language	English
Publisher	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Publisher Date	2014-12-07
Publisher Place	USA
Access Restriction	Subscribed
Rights Holder	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Subject Keyword	Indexes Europe Computational modeling Stochastic processes Approximation methods Transforms Mathematical model
Content Type	Text
Resource Type	Article

Sl.	Authority	Responsibilities	Communication Details
1	Ministry of Education (GoI), Department of Higher Education	Sanctioning Authority	https://www.education.gov.in/ict-initiatives
2	Indian Institute of Technology Kharagpur	Host Institute of the Project: The host institute of the project is responsible for providing infrastructure support and hosting the project	https://www.iitkgp.ac.in
3	National Digital Library of India Office, Indian Institute of Technology Kharagpur	The administrative and infrastructural headquarters of the project	Dr. B. Sutradhar bsutra@ndl.gov.in
4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
5	Website/Portal (Helpdesk)	Queries regarding NDLI and its services	support@ndl.gov.in
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9	IDR Setup or Support	Queries related to establishment and support of Institutional Digital Repository (IDR) and IDR workshops	idr@ndl.gov.in

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