Generating Sample Paths

Abstract

This chapter develops methods for simulating paths of a variety of stochastic processes important in financial engineering. The emphasis in this chapter is on methods for exact simulation of continuous-time processes at a discrete set of dates. The methods are exact in the sense that the joint distribution of the simulated values coincides with the joint distribution of the continuous-time process on the simulation time grid. Exact methods rely on special features of a model and are generally available only for models that offer some tractability. More complex models must ordinarily be simulated through, e.g., discretization of stochastic differential equations, as discussed in Chapter 6.