Markov chain approximation and measure change for time-inhomogeneous stochastic processes

作者：

Highlights：

• A general time-inhomogeneous CTMC framework is proposed for the approximation of the general one-dimensional and two-dimensional time-inhomogeneous diffusion processes.

• A change of measure can be performed on the approximating CTMC.

• The minimal relative entropy measure is chosen, and its convergence is established.

• European and barrier option valuation examples demonstrate the accuracy of the proposed methodology.

摘要

•A general time-inhomogeneous CTMC framework is proposed for the approximation of the general one-dimensional and two-dimensional time-inhomogeneous diffusion processes.•A change of measure can be performed on the approximating CTMC.•The minimal relative entropy measure is chosen, and its convergence is established.•European and barrier option valuation examples demonstrate the accuracy of the proposed methodology.

论文关键词：CTMC,Time-inhomogeneous,Minimal relative entropy measure,Convergence,Option pricing

论文评审过程：Received 5 July 2020, Revised 16 September 2020, Accepted 3 October 2020, Available online 20 October 2020, Version of Record 20 October 2020.

论文官网地址：https://doi.org/10.1016/j.amc.2020.125732