BFS 2002

Contributed Talk

Asymptotic Properties of Monte Carlo Estimators of Diffusion Processes

Marcel Rindisbacher, Jerome Detemple, Rene Garcia

This paper studies the limit distributions of Monte Carlo estimators of diffusion processes. Two types of estimators are examined. The first one is based on the Euler scheme applied to the original processes; the second applies the Euler scheme to a variance-stabilizing transformation of the processes. We show that the transformation increases the speed of convergence of the Euler scheme. The limit distribution of this estimator is derived in explicit form and is found to be non-centered. We also study estimators of conditional expectations of diffusions with known initial state. Expected approximation errors are characterized and used to construct second order bias corrected estimators. These enable us to eliminate the size distortion of asymptotic confidence intervals and to examine the relative efficiency of estimators. Finally, we derive the limit distributions of Monte Carlo estimators of conditional expectations with unknown initial state. The variance-stabilizing transformation is again found to increase the speed of convergence. Our results are illustrated in the context of the dynamic portfolio choice problem. They enable us to develop efficient designs of Monte Carlo estimators of diffusions.