Lamperti Semi-Discrete method

Abstract

We study the numerical approximation of numerous processes, solutions of nonlinear stochastic differential equations, that appear in various applications such as financial mathematics and population dynamics. Between the investigated models are the CIR process, also known as the square root process, the constant elasticity of variance process CEV, the Heston 3/2-model, the Aït-Sahalia model and the Wright-Fisher model. We propose a version of the semi-discrete method, see [1], which we call Lamperti semidiscrete (LSD) method. The LSD method is domain preserving and seems to converge strongly to the solution process with order 1 and no extra restrictions on the parameters or the step-size.