On an approximation problem for stochastic integrals where random time nets do not help

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Abstract

Given a geometric Brownian motion S=(St)t∈[0,T] and a Borel measurable function g:(0,∞)→R such that g(ST)∈L2, we approximate g(ST)-Eg(ST) by∑i=1nvi-1(Sτi-Sτi-1)where 0= τ0≤⋯≤τn=T is an increasing sequence of stopping times and the vi-1 are Fτi-1-measurable random variables such that Evi-12(Sτi-Sτi-1)2<∞ ((Ft)t∈[0,T] is the augmentation of the natural filtration of the underlying Brownian motion). In case that g is not almost surely linear, we show that one gets a lower bound for the L2-approximation rate of 1/n if one optimizes over all nets consisting of n+1 stopping times. This lower bound coincides with the upper bound for all reasonable functions g in case deterministic time-nets are used. Hence random time nets do not improve the rate of convergence in this case. The same result holds true for the Brownian motion instead of the geometric Brownian motion. © 2005 Elsevier B.V. All rights reserved.

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Geiss, C., & Geiss, S. (2006). On an approximation problem for stochastic integrals where random time nets do not help. Stochastic Processes and Their Applications, 116(3), 407–422. https://doi.org/10.1016/j.spa.2005.10.002

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