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Cubature on Wiener space: pathwise convergence

Research paper by Christian Bayer, Peter K. Friz

Indexed on: 16 Apr '13Published on: 16 Apr '13Published in: Mathematics - Probability



Abstract

Cubature on Wiener space [Lyons, T.; Victoir, N.; Proc. R. Soc. Lond. A 8 January 2004 vol. 460 no. 2041 169-198] provides a powerful alternative to Monte Carlo simulation for the integration of certain functionals on Wiener space. More specifically, and in the language of mathematical finance, cubature allows for fast computation of European option prices in generic diffusion models. We give a random walk interpretation of cubature and similar (e.g. the Ninomiya--Victoir) weak approximation schemes. By using rough path analysis, we are able to establish weak convergence for general path-dependent option prices.