The Skorohod problem and weak approximation of stochastic differential equations in time-dependent domains

by Önskog, Thomas, PhD

Abstract (Summary)
This thesis consists of a summary and four scientific articles. All four articles consider various aspects of stochastic differential equations and the purpose of the summary is to provide an introduction to this subject and to supply the notions required in order to fully understand the articles.In the first article we conduct a thorough study of the multi-dimensional Skorohod problem in time-dependent domains. In particular we prove the existence of cádlág solutions to the Skorohod problem with oblique reflection in time-independent domains with corners. We use this existence result to construct weak solutions to stochastic differential equations with oblique reflection in time-dependent domains. In the process of obtaining these results we also establish convergence results for sequences of solutions to the Skorohod problem and a number of estimates for solutions, with bounded jumps, to the Skorohod problem.The second article considers the problem of determining the sensitivities of a solution to a second order parabolic partial differential equation with respect to perturbations in the parameters of the equation. We derive an approximate representation of the sensitivities and an estimate of the discretization error arising in the sensitivity approximation. We apply these theoretical results to the problem of determining the sensitivities of the price of European swaptions in a LIBOR market model with respect to perturbations in the volatility structure (the so-called ‘Greeks’).The third article treats stopped diffusions in time-dependent graph domains with low regularity. We compare, numerically, the performance of one adaptive and three non-adaptive numerical methods with respect to order of convergence, efficiency and stability. In particular we investigate if the performance of the algorithms can be improved by a transformation which increases the regularity of the domain but, at the same time, reduces the regularity of the parameters of the diffusion.In the fourth article we use the existence results obtained in Article I to construct a projected Euler scheme for weak approximation of stochastic differential equations with oblique reflection in time-dependent domains. We prove theoretically that the order of convergence of the proposed algorithm is 1/2 and conduct numerical simulations which support this claim.
Bibliographical Information:


School:Umeå universitet

School Location:Sweden

Source Type:Doctoral Dissertation

Keywords:MATHEMATICS; Skorohod problem; weak approximation; time-dependent domain; stochastic differential equations; parabolic partial differential equations; oblique reflection; stopped diffusions; Euler scheme; adaptive methods; sensitivity analysis; financial derivatives; 'Greeks'; Mathematics; matematik


Date of Publication:01/01/2009

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