Approximation of exit times for one-dimensional linear diffusion processes

Abstract

In order to approximate the exit time of a one-dimensional diffusion process, we propose an algorithm based on a random walk. Such an algorithm was already introduced in both the Brownian context and the Ornstein–Uhlenbeck context, that is for particular time-homogeneous diffusion processes. Here the aim is therefore to generalize this efficient numerical approach in order to obtain an approximation of both the exit time and position for a general linear diffusion. The main challenge of such a generalization is to handle with time-inhomogeneous diffusions. The efficiency of the method is described with particular care through theoretical results and numerical examples.