Speeding up the Euler scheme for killed diffusions

Abstract

Let $X$ be a linear diffusion taking values in $(\ell,r)$ and consider the standard Euler scheme to compute an approximation to $\mathbb{E}[g(X_T)\mathbf{1}_{[T<\zeta]}]$ for a given function $g$ and a deterministic $T$, where $\zeta=\inf\{t\geq 0: X_t \notin (\ell,r)\}$. It is well-known since \cite{GobetKilled} that the presence of killing introduces a loss of accuracy and reduces the weak convergence rate to $1/\sqrt{N}$ with $N$ being the number of discretisatons. We introduce a drift-implicit Euler method to bring the convergence rate back to $1/N$, i.e. the optimal rate in the absence of killing, using the theory of recurrent transformations developed in \cite{rectr}. Although the current setup assumes a one-dimensional setting, multidimensional extension is within reach as soon as a systematic treatment of recurrent transformations is available in higher dimensions.