Continuous-time perpetuities and time reversal of diffusions

Constantinos Kardaras; Scott Robertson

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arXiv · 1411.7551

Continuous-time perpetuities and time reversal of diffusions

Constantinos Kardaras·Scott Robertson

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Abstract

We consider the problem of estimating the joint distribution of a continuous-time perpetuity and the underlying factors which govern the cash flow rate, in an ergodic Markov model. Two approaches are used to obtain the distribution. The first identifies a partial differential equation for the conditional cumulative distribution function of the perpetuity given the initial factor value, which under certain conditions ensures the existence of a density for the perpetuity. The second (and more general) approach, identifies the joint law as the stationary distribution of an ergodic multi-dimensional diffusion using techniques of time reversal. This later approach allows for efficient use of Monte-Carlo simulation when estimating the distribution, as the distribution is obtained by sampling a single path of the reversed process.

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Constantinos Kardaras, Scott Robertson. 2014-11-27. Continuous-time perpetuities and time reversal of diffusions. https://arxiv.org/abs/1411.7551

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