g05xdf computes scaled increments of sample paths of a free or non-free Wiener process, where the sample paths are constructed by a Brownian bridge algorithm. The initialization routine g05xcf must be called prior to the first call to g05xdf.

2 Specification

Fortran Interface

Subroutine g05xdf (

npaths, rcord, d, a, diff, z, ldz, c, ldc, b, ldb, rcomm, ifail)

Integer, Intent (In)	::	npaths, rcord, d, a, ldz, ldc, ldb
Integer, Intent (Inout)	::	ifail
Real (Kind=nag_wp), Intent (In)	::	diff(d), c(ldc,), rcomm()
Real (Kind=nag_wp), Intent (Inout)	::	z(ldz,), b(ldb,)

C Header Interface

#include <nag.h>

void	g05xdf_ (const Integer npaths, const Integer rcord, const Integer d, const Integer a, const double diff[], double z[], const Integer ldz, const double c[], const Integer ldc, double b[], const Integer ldb, const double rcomm[], Integer ifail)

The routine may be called by the names g05xdf or nagf_rand_bb_inc.

3 Description

For details on the Brownian bridge algorithm and the bridge construction order see Section 2.6 in the G05 Chapter Introduction and Section 3 in g05xcf. Recall that the terms Wiener process (or free Wiener process) and Brownian motion are often used interchangeably, while a non-free Wiener process (also known as a Brownian bridge process) refers to a process which is forced to terminate at a given point.

Fix two times

t_{0} < T

, let

{(t_{i})}_{1 \leq i \leq N}

be any set of time points satisfying

t_{0} < t_{1} < t_{2} < \dots < t_{N} < T

, and let

X_{t_{0}}

{(X_{t_{i}})}_{1 \leq i \leq N}

X_{T}

denote a

d

-dimensional Wiener sample path at these time points.

The Brownian bridge increments generator uses the Brownian bridge algorithm to construct sample paths for the (free or non-free) Wiener process

X

, and then uses this to compute the scaled Wiener increments

\frac{X_{t_{1}} - X_{t_{0}}}{t_{1} - t_{0}}, \frac{X_{t_{2}} - X_{t_{1}}}{t_{2} - t_{1}}, \dots, \frac{X_{t_{N}} - X_{t_{N - 1}}}{t_{N} - t_{N - 1}}, \frac{X_{T} - X_{t_{N}}}{T - t_{N}}

The example program in Section 10 shows how these increments can be used to compute a numerical solution to a stochastic differential equation (SDE) driven by a (free or non-free) Wiener process.

4 References

Glasserman P (2004) Monte Carlo Methods in Financial Engineering Springer

5 Arguments

Note: the following variable is used in the parameter descriptions:

N = ntimes

, the length of the array times passed to the initialization routine g05xcf.

1: $npaths$ – Integer Input

On entry: the number of Wiener sample paths.

Constraint:

npaths \geq 1

2: $rcord$ – Integer Input

On entry: the order in which Normal random numbers are stored in z and in which the generated values are returned in b.

Constraint:

rcord = 1

2

3: $d$ – Integer Input

On entry: the dimension of each Wiener sample path.

Constraint:

d \geq 1

4: $a$ – Integer Input

On entry: if

a = 0

, a free Wiener process is created and diff is ignored.

a = 1

, a non-free Wiener process is created where diff is the difference between the terminal value and the starting value of the process.

Constraint:

a = 0

1

5: $diff (d)$ – Real (Kind=nag_wp) array Input

On entry: the difference between the terminal value and starting value of the Wiener process. If

a = 0

, diff is ignored.

6: $z (ldz *)$ – Real (Kind=nag_wp) array Input/Output

Note: the second dimension of the array z must be at least

npaths

rcord = 1

and at least

d \times (N + 1 - a)

rcord = 2

On entry: the Normal random numbers used to construct the sample paths.

If quasi-random numbers are used, the

d \times (N + 1 - a)

-dimensional quasi-random points should be stored in successive rows of

Z

On exit: the Normal random numbers premultiplied by c.

7: $ldz$ – Integer Input

On entry: the first dimension of the array z as declared in the (sub)program from which g05xdf is called.

Constraints:

if $rcord = 1$ , $ldz \geq d \times (N + 1 - a)$ ;
if $rcord = 2$ , $ldz \geq npaths$ .

8: $c (ldc *)$ – Real (Kind=nag_wp) array Input

Note: the second dimension of the array c must be at least

d

On entry: the lower triangular Cholesky factorization

C

such that

C C^{T}

gives the covariance matrix of the Wiener process. Elements of

C

above the diagonal are not referenced.

9: $ldc$ – Integer Input

On entry: the first dimension of the array c as declared in the (sub)program from which g05xdf is called.

Constraint:

ldc \geq d

10: $b (ldb *)$ – Real (Kind=nag_wp) array Output

Note: the second dimension of the array b must be at least

npaths

rcord = 1

and at least

d \times (N + 1)

rcord = 2

On exit: the scaled Wiener increments.

Let

X_{p, i}^{k}

denote the

k

th dimension of the

i

th point of the

p

th sample path where

1 \leq k \leq d

1 \leq i \leq N + 1

and

1 \leq p \leq npaths

. The increment

\frac{(X_{p, i}^{k} - X_{p, i - 1}^{k})}{(t_{i} - t_{i - 1})}

is stored at

B (p, k + (i - 1) \times d)

11: $ldb$ – Integer Input

On entry: the first dimension of the array b as declared in the (sub)program from which g05xdf is called.

Constraints:

if $rcord = 1$ , $ldb \geq d \times (N + 1)$ ;
if $rcord = 2$ , $ldb \geq npaths$ .

12: $rcomm (*)$ – Real (Kind=nag_wp) array Communication Array

Note: the dimension of this array is dictated by the requirements of associated functions that must have been previously called. This array must be the same array passed as argument rcomm in the previous call to g05xcf or g05xdf.

On entry: communication array as returned by the last call to g05xcf or g05xdf. This array must not be directly modified.

13: $ifail$ – Integer Input/Output

On entry: ifail must be set to

0

- 1

1

to set behaviour on detection of an error; these values have no effect when no error is detected.

A value of

0

causes the printing of an error message and program execution will be halted; otherwise program execution continues. A value of

- 1

means that an error message is printed while a value of

1

means that it is not.

If halting is not appropriate, the value

- 1

1

is recommended. If message printing is undesirable, then the value

1

is recommended. Otherwise, the value

0

is recommended. When the value $- 1$ or $1$ is used it is essential to test the value of ifail on exit.

On exit:

ifail = 0

unless the routine detects an error or a warning has been flagged (see Section 6).

6 Error Indicators and Warnings

If on entry

ifail = 0

- 1

, explanatory error messages are output on the current error message unit (as defined by x04aaf).

Errors or warnings detected by the routine:

$ifail = 1$: On entry, rcomm was not initialized or has been corrupted.

$ifail = 2$: On entry, $npaths = 〈value〉$ .
Constraint: $npaths \geq 1$ .

$ifail = 3$: On entry, $rcord = 〈value〉$ was an illegal value.

$ifail = 4$: On entry, $d = 〈value〉$ .
Constraint: $d \geq 1$ .

$ifail = 5$: On entry, $a = 〈value〉$ .
Constraint: $a = 0 or 1$ .

$ifail = 6$: On entry, $ldz = 〈value〉$ and $d \times (ntimes + 1 - a) = 〈value〉$ .
Constraint: $ldz \geq d \times (ntimes + 1 - a)$ .

On entry, $ldz = 〈value〉$ and $npaths = 〈value〉$ .
Constraint: $ldz \geq npaths$ .

$ifail = 7$: On entry, $ldc = 〈value〉$ .
Constraint: $ldc \geq 〈value〉$ .

$ifail = 8$: On entry, $ldb = 〈value〉$ and $d \times (ntimes + 1) = 〈value〉$ .
Constraint: $ldb \geq d \times (ntimes + 1)$ .

On entry, $ldb = 〈value〉$ and $npaths = 〈value〉$ .
Constraint: $ldb \geq npaths$ .

$ifail = - 99$: An unexpected error has been triggered by this routine. Please contact NAG.
See Section 7 in the Introduction to the NAG Library FL Interface for further information.

$ifail = - 399$: Your licence key may have expired or may not have been installed correctly.
See Section 8 in the Introduction to the NAG Library FL Interface for further information.

$ifail = - 999$: Dynamic memory allocation failed.
See Section 9 in the Introduction to the NAG Library FL Interface for further information.

7 Accuracy

Not applicable.

8 Parallelism and Performance

g05xdf is threaded by NAG for parallel execution in multithreaded implementations of the NAG Library.

g05xdf makes calls to BLAS and/or LAPACK routines, which may be threaded within the vendor library used by this implementation. Consult the documentation for the vendor library for further information.

Please consult the X06 Chapter Introduction for information on how to control and interrogate the OpenMP environment used within this routine. Please also consult the Users' Note for your implementation for any additional implementation-specific information.

9 Further Comments

None.

10 Example

The scaled Wiener increments produced by this routine can be used to compute numerical solutions to stochastic differential equations (SDEs) driven by (free or non-free) Wiener processes. Consider an SDE of the form

d Y_{t} = f (t, Y_{t}) dt + σ (t, Y_{t}) d X_{t}

on the interval

[t_{0}, T]

where

{(X_{t})}_{t_{0} \leq t \leq T}

is a (free or non-free) Wiener process and

f

and

σ

are suitable functions. A numerical solution to this SDE can be obtained by the Euler–Maruyama method. For any discretization

t_{0} < t_{1} < t_{2} < \dots < t_{N + 1} = T

[t_{0}, T]

, set

Y_{t_{i + 1}} = Y_{t_{i}} + f (t_{i}, Y_{t_{i}}) (t_{i + 1} - t_{i}) + σ (t_{i}, Y_{t_{i}}) (X_{t_{i + 1}} - X_{t_{i}})

for

i = 1, \dots, N

so that

Y_{t_{N + 1}}

is an approximation to

Y_{T}

. The scaled Wiener increments produced by g05xdf can be used in the Euler–Maruyama scheme outlined above by writing

Y_{t_{i + 1}} = Y_{t_{i}} + (t_{i + 1} - t_{i}) (f (t_{i}, Y_{t_{i}}) + σ (t_{i}, Y_{t_{i}}) (\frac{X_{t_{i + 1}} - X_{t_{i}}}{t_{i + 1} - t_{i}})) .

The following example program uses this method to solve the SDE for geometric Brownian motion

d S_{t} = r S_{t} dt + σ S_{t} d X_{t}

where

X

is a Wiener process, and compares the results against the analytic solution

S_{T} = S_{0} exp ((r - σ^{2} / 2) T + σ X_{T}) .

Quasi-random variates are used to construct the Wiener increments.

10.1 Program Text

Program Text (g05xdfe.f90)

10.2 Program Data

None.

10.3 Program Results

Program Results (g05xdfe.r)

NAG Library Manual, Mark 27

Interfaces: FL CL CPP AD

NAG FL Interface Introduction

G05 (Rand) Chapter Contents

G05 (Rand) Chapter Introduction

g05xd: FL CL CPP AD

NAG FL Interfaceg05xdf (bb_​inc)

▸▿ Contents

1 Purpose

2 Specification

3 Description

4 References

5 Arguments

6 Error Indicators and Warnings

7 Accuracy

8 Parallelism and Performance

9 Further Comments

10 Example

10.1 Program Text

10.2 Program Data

10.3 Program Results

NAG FL Interface
g05xdf (bb_inc)