TY - JOUR
T1 - Crossing probabilities for diffusions with piecewise continuous boundaries
AU - Wang, Liqun
AU - Pötzelberger, Klaus
PY - 2007/11/1
Y1 - 2007/11/1
N2 - We propose an approach to compute the boundary crossing probabilities for a class of diffusion processes which can be expressed as piecewise monotone (not necessarily one-to-one) functionals of a standard Brownian motion. This class includes many interesting processes in real applications, e.g., Ornstein-Uhlenbeck, growth processes and geometric Brownian motion with time dependent drift. This method applies to both one-sided and two-sided general nonlinear boundaries, which may be discontinuous. Using this approach explicit formulas for boundary crossing probabilities for certain nonlinear boundaries are obtained, which are useful in evaluation and comparison of various computational algorithms. Moreover, numerical computation can be easily done by Monte Carlo integration and the approximation errors for general boundaries are automatically calculated. Some numerical examples are presented.
AB - We propose an approach to compute the boundary crossing probabilities for a class of diffusion processes which can be expressed as piecewise monotone (not necessarily one-to-one) functionals of a standard Brownian motion. This class includes many interesting processes in real applications, e.g., Ornstein-Uhlenbeck, growth processes and geometric Brownian motion with time dependent drift. This method applies to both one-sided and two-sided general nonlinear boundaries, which may be discontinuous. Using this approach explicit formulas for boundary crossing probabilities for certain nonlinear boundaries are obtained, which are useful in evaluation and comparison of various computational algorithms. Moreover, numerical computation can be easily done by Monte Carlo integration and the approximation errors for general boundaries are automatically calculated. Some numerical examples are presented.
UR - http://www.ingentaconnect.com/content/klu/mcap/2007/00000009/00000001/00009002
M3 - Journal article
SN - 1387-5841
VL - 9
SP - 21
EP - 40
JO - Methodology and Computing in Applied Probability
JF - Methodology and Computing in Applied Probability
IS - 1
ER -