Higher-order adaptive methods for exit times of Itô diffusions

Abstract: We construct a higher-order adaptive method for strong approximations of exit times of It^o stochastic differential equations (SDE). The method employs a strong It^o--Taylor scheme for simulating SDE paths, and adaptively decreases the step-size in the numerical integration as the solution approaches the boundary of the domain. These techniques turn out to complement each other nicely: adaptive time-stepping improves the accuracy of the exit time by reducing the magnitude of the overshoot of the numerical solution when it exits the domain, and higher-order schemes improve the approximation of the state of the diffusion process. We present two versions of the higher-order adaptive method. The first one uses the Milstein scheme as numerical integrator and two step-sizes for adaptive time-stepping: $h$ when far away from the boundary and $h<sup>2$ when close to the boundary. The second method is an extension of the first one using the strong It^o--Taylor scheme of order 1.5 as numerical integrator and three step-sizes for adaptive time-stepping. For any $\xi&gt;0$, we prove that the strong error is bounded by $\mathcal{O}(h<sup>{1-\xi})$ and $\mathcal{O}(h<sup>{3/2-\xi})$ for the first and second method, respectively, and the expected computational cost for both methods is $\mathcal{O}(h^{-1} \log(h<sup>{-1}))$. Theoretical results are supported by numerical examples, and we discuss the potential for extensions that improve the strong convergence rate even further.