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**Class: **hwv

Simulate approximate solution of diagonal-drift HWV processes

`[Paths,Times,Z] = simBySolution(MDL,NPERIODS)`

[Paths,Times,Z] = simBySolution(MDL,NPERIODS,Name,Value)

`[Paths,Times,Z] = simBySolution(MDL,NPERIODS)`

simulates
approximate solution of diagonal-drift for Hull-White/Vasicek Gaussian
Diffusion (HWV) processes.

`[Paths,Times,Z] = simBySolution(MDL,NPERIODS,Name,Value)`

simulates
approximate solution of diagonal-drift for Hull-White/Vasicek Gaussian
Diffusion (HWV) processes with additional options specified by one
or more `Name,Value`

pair arguments.

The `simBySolution`

method simulates `NTRIALS`

sample
paths of `NVARS`

correlated state variables, driven
by `NBROWNS`

Brownian motion sources of risk over `NPERIODS`

consecutive
observation periods, approximating continuous-time Hull-White/Vasicek
(HWV) by an approximation of the closed-form solution.

Consider a separable, vector-valued HWV model of the form:

$$d{X}_{t}=S(t)[L(t)-{X}_{t}]dt+V(t)d{W}_{t}$$

where:

*X*is an*NVARS*-by-`1`

state vector of process variables.*S*is an*NVARS*-by-*NVARS*matrix of mean reversion speeds (the rate of mean reversion).*L*is an*NVARS*-by-`1`

vector of mean reversion levels (long-run mean or level).*V*is an*NVARS*-by-*NBROWNS*instantaneous volatility rate matrix.*W*is an*NBROWNS*-by-`1`

Brownian motion vector.

The `simBySolution`

method simulates the state
vector *X _{t}* using an approximation
of the closed-form solution of diagonal-drift models.

When evaluating the expressions, `simBySolution`

assumes
that all model parameters are piecewise-constant over each simulation
period.

In general, this is *not* the exact solution
to the models, because the probability distributions of the simulated
and true state vectors are identical *only* for
piecewise-constant parameters.

When parameters are piecewise-constant over each observation
period, the simulated process is exact for the observation times at
which *X _{t}* is sampled.

The input argument

`Z`

allows you to directly specify the noise generation process. This process takes precedence over the`Correlation`

parameter of the`sde`

object and the value of the`Antithetic`

input flag. If you do not specify a value for`Z`

,`simBySolution`

generates correlated Gaussian variates, with or without antithetic sampling as requested.Gaussian diffusion models, such as HWV, allow negative states. By default,

`simBySolution`

does nothing to prevent negative states, nor does it guarantee that the model be strictly mean-reverting. Thus, the model may exhibit erratic or explosive growth.The end-of-period

`Processes`

argument allows you to terminate a given trial early. At the end of each time step,`simBySolution`

tests the state vector*X*for an all-_{t}`NaN`

condition. Thus, to signal an early termination of a given trial, all elements of the state vector*X*must be_{t}`NaN`

. This test enables a user-defined`Processes`

function to signal early termination of a trial, and offers significant performance benefits in some situations (for example, pricing down-and-out barrier options).

Ait-Sahalia, Y. “Testing Continuous-Time Models of the
Spot Interest Rate.” *The Review of Financial Studies*,
Spring 1996, Vol. 9, No. 2, pp. 385–426.

Ait-Sahalia, Y. “Transition Densities for Interest Rate
and Other Nonlinear Diffusions.” *The Journal of
Finance*, Vol. 54, No. 4, August 1999.

Glasserman, P. *Monte Carlo Methods in Financial Engineering.* New
York, Springer-Verlag, 2004.

Hull, J. C. *Options, Futures, and Other Derivatives*,
5th ed. Englewood Cliffs, NJ: Prentice Hall, 2002.

Johnson, N. L., S. Kotz, and N. Balakrishnan. *Continuous
Univariate Distributions.* Vol. 2, 2nd ed. New York, John
Wiley & Sons, 1995.

Shreve, S. E. *Stochastic Calculus for Finance II:
Continuous-Time Models.* New York: Springer-Verlag, 2004.

`hwv`

| `simByEuler`

| `simBySolution`

| `simulate`

- Creating Hull-White/Vasicek (HWV) Gaussian Diffusion Models
- Simulating Equity Prices
- Simulating Interest Rates
- Stratified Sampling
- Pricing American Basket Options by Monte Carlo Simulation
- Base SDE Models
- Drift and Diffusion Models
- Linear Drift Models
- Parametric Models
- SDEs
- SDE Models
- SDE Class Hierarchy
- Performance Considerations

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