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Approximation of stochastic differential equations driven by alpha-stable Levy motion

Author

Listed:
  • Aleksander Janicki
  • Zbigniew Michna
  • Aleksander Weron

Abstract

In this paper we present a result on convergence of approximate solutions of stochastic differential equations involving integrals with respect to alpha-stable Levy motion. We prove an appropriate weak limit theorem, which does not follow from known results on stability properties of stochastic differential equations driven by semimartingales. It assures convergence in law in the Skorokhod topology of sequences of approximate solutions and justifies discrete time schemes applied in computer simulations. An example is included in order to demonstrate that stochastic differential equations with jumps are of interest in constructions of models for various problems arising in science and engineering, often providing better description of real life phenomena than their Gaussian counterparts. In order to demonstrate the usefulness of our approach, we present computer simulations of a continuous time alpha-stable model of cumulative gain in the Duffie–Harrison option pricing framework.

Suggested Citation

  • Aleksander Janicki & Zbigniew Michna & Aleksander Weron, 1996. "Approximation of stochastic differential equations driven by alpha-stable Levy motion," HSC Research Reports HSC/96/02, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    • Handle: RePEc:wuu:wpaper:hsc9602
    as

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    File URL: http://matwbn.icm.edu.pl/ksiazki/zm/zm24/zm2424.pdf
    File Function: Final printed version, 1996
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    References listed on IDEAS

    as
    1. Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Science and Technology, number hsbook9401, December.
    2. Slominski, Leszek, 1989. "Stability of strong solutions of stochastic differential equations," Stochastic Processes and their Applications, Elsevier, vol. 31(2), pages 173-202, April.
    3. Aleksander Janicki & Aleksander Weron, 1994. "Can One See Alpha-stable Variables and Processes?," HSC Research Reports HSC/94/01, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    4. Kasahara, Yuji & Yamada, Keigo, 1991. "Stability theorem for stochastic differential equations with jumps," Stochastic Processes and their Applications, Elsevier, vol. 38(1), pages 13-32, June.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Chen, Peng & Deng, Chang-Song & Schilling, René L. & Xu, Lihu, 2023. "Approximation of the invariant measure of stable SDEs by an Euler–Maruyama scheme," Stochastic Processes and their Applications, Elsevier, vol. 163(C), pages 136-167.
    2. Valentin Konakov & Stéphane Menozzi, 2011. "Weak Error for Stable Driven Stochastic Differential Equations: Expansion of the Densities," Journal of Theoretical Probability, Springer, vol. 24(2), pages 454-478, June.

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    More about this item

    Keywords

    Stable distribution; Simulation; Stochastic differential equation (SDE); Option pricing;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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