Exact simulation of the first passage time through a given level of jump diffusions

• Published in: Mathematics and computers in simulation Vol. 203; pp. 553 - 576
• Main Authors: Herrmann, Samuel, Massin, Nicolas
• Format: Journal Article
• Language: English
• Published: Elsevier 01.01.2023
• Subjects: Mathematics; Probability; Girsanov formula; first passage time; stochastic algorithm; Bessel process; jump diffusion; rejection sampling
• ISSN: 0378-4754
• DOI: 10.1016/j.matcom.2022.07.007

Continuous-time stochastic processes play an important role in the description of random phenomena, it is therefore of prime interest to study particular variables depending on their paths, like stopping time for example. One approach consists in pointing out explicit expressions of the probability distributions, an other approach is rather based on the numerical generation of the random variables. We propose an algorithm in order to generate the first passage time through a given level of a one-dimensional jump diffusion. This process satisfies a stochastic differential equation driven by a Brownian motion and subject to random shocks characterized by an independent Poisson process. Our algorithm belongs to the family of rejection sampling procedures, also called exact simulation in this context: the outcome of the algorithm and the stopping time under consideration are identically distributed. It is based on both the exact simulation of the diffusion at a given time and on the exact simulation of first passage time for continuous diffusions. It is therefore based on an extension of the algorithm introduced by Herrmann and Zucca [16] in the continuous framework. The challenge here is to generate the exact position of a continuous diffusion conditionally to the fact that the given level has not been reached before. We present the construction of the algorithm and give numerical illustrations, conditions on the recurrence of jump diffusions are also discussed.