2022/12/02 by Gabriel Lord Mengchao Wang, Wang, Gabriel Lord Mengchao
Business, Management and Accounting · Economics, Econometrics and Finance · Mathematics · #60H15 #60H35 #65C30 #Advanced Queuing Theory Analysis #FOS: Mathematics #Numerical Analysis (math.NA) #Numerical methods for differential equations #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2212.01134
openalex publication_date 2022/12/02 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We prove mean-square convergence of a novel numerical method, the tamed-splitting method, for a generalized Ait-Sahalia interest rate model. The method is based on a Lamperti transform, splitting and applying a tamed numerical method for the nonlinearity. The main difficulty in the analysis is caused by the non-globally Lipschitz drift coefficients of the model. We examine the existence, uniqueness of the solution and boundedness of moments for the transformed SDE.We then prove bounded moments and inverses moments for the numerical approximation. The tamed-splitting method is a hybrid method in the sense that a backstop method is invoked to prevent solutions from overshooting zero and becoming negative. We successfully recover the mean-square convergence rate of order one for the tamed-splitting method. In addition we prove that the probability of ever needing the backstop method to prevent a negative value can be made arbitrarily small. In our numerical experiments we compare to other numerical methods in the literature for realistic parameter values.