Uniform approximation of the Cox-Ingersoll-Ross process

Abstract

The Doss-Sussmann (DS) approach is used for uniform simulation of the Cox-Ingersoll-Ross (CIR) process. TheDS formalism allows us to express trajectories of the CIR process through solutions of some ordinary differential equation (ODE) depending on realizations of aWiener process involved. By simulating the first-passage times of the increments of the Wiener process to the boundary of an interval and solving the ODE, we uniformly approximate the trajectories of the CIR process. In this respect special attention is payed to simulation of trajectories near 0. From a conceptual point of view the proposed method gives a better quality of approximation (from a pathwise point of view) than standard, even exact, simulation of the stochastic differential equation at some deterministic time grid. © 2015 Applied Probability Trust.