On the Simulation of a Special Class of Time-Inhomogeneous Diffusion Processes

Abstract

General methods to simulate probability density functions and first passage time densities are provided for time-inhomogeneous stochastic diffusion processes obtained via a composition of two Gauss–Markov processes conditioned on the same initial state. Many diffusion processes with time-dependent infinitesimal drift and infinitesimal variance are included in the considered class. For these processes, the transition probability density function is explicitly determined. Moreover, simulation procedures are applied to the diffusion processes obtained starting from Wiener and Ornstein–Uhlenbeck processes. Specific examples in which the infinitesimal moments include periodic functions are discussed.

Keywords

• Gauss–Markov processes
• Wiener process
• Ornstein–Uhlenbeck process
• first-passage time densities
• simulation algorithms