Localization and Exact Simulation of Brownian Motion-Driven Stochastic Differential Equations

  title={Localization and Exact Simulation of Brownian Motion-Driven Stochastic Differential Equations},
  author={Nan Chen and Zhengyu Huang},
  journal={Math. Oper. Res.},
Generating sample paths of stochastic differential equations (SDE) using the Monte Carlo method finds wide applications in financial engineering. Discretization is a popular approximate approach to generating those paths: it is easy to implement but prone to simulation bias. This article presents a new simulation scheme to exactly generate samples for SDEs. The key observation is that the law of a general SDE can be decomposed into a product of the law of standard Brownian motion and the law of… CONTINUE READING
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