Core Concepts
Novel explicit Euler-type scheme for Ait-Sahalia model with unconditional positivity preservation and mean-square convergence rate of 0.5.
Abstract
The article introduces a novel explicit Euler-type scheme for the generalized Ait-Sahalia model in mathematical finance. It addresses challenges posed by nonlinear drift, diffusion coefficients, and positivity preservation requirements. The proposed scheme ensures unconditional positivity preservation and achieves a mean-square convergence rate of 0.5 in both non-critical and general critical cases. The work aims to support multi-level Monte Carlo simulations by providing theoretical justification and practical numerical experiments.
Introduction
Mathematical finance focuses on pricing financial assets using stochastic differential equations (SDEs).
Ait-Sahalia model proposed as a solution to capture dynamics of interest rates.
Generalized Ait-Sahalia Model
Notations used in the paper defined.
The model's well-posedness established through theorems and lemmas.
Explicit Positivity-Preserving Euler-Type Scheme
Proposal of an explicit Euler-type method for approximating the Ait-Sahalia model.
Unconditional positivity preservation demonstrated through Lemmas and Assumptions.
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