Polynomial Chaos Expansion Approach to Interest Rate Models

<div>Probability density function of GBM at time <svg height="8.85534pt" id="M257" style="vertical-align:-0.04981041pt" version="1.1" viewbox="-0.0498162 -8.80553 30.1943 8.85534" width="30.1943pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M655 676H628C608 656 600 650 571 650H156C118 650 114 651 102 676H77C63 615 45 548 24 485L60 486C81 531 97 562 114 580C134 603 148 611 252 611H308L217 127C201 41 196 38 105 32L98 0H384L393 32C300 38 288 41 304 127L393 611H466C553 611 571 604 582 580C592 559 597 530 595 485L630 489C636 548 645 624 655 676Z" id="g50-85"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="673" vert-adv-y="673"></glyph.data></g><g transform="matrix(.013,0,0,-0.013,12.064,0)"><path d="M556 331V384H55V331H556ZM556 140V193H55V140H556Z" id="g54-34"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="611" vert-adv-y="611"></glyph.data></g><g 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xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M463 633C453 636 427 644 417 648C388 660 349 667 316 667C183 667 100 592 100 483C100 398 176 335 223 305L259 282C321 242 358 203 358 149C358 66 301 22 234 22C110 22 70 131 57 208L24 205L28 48C51 23 128 -17 215 -17C342 -17 446 60 446 174C446 262 394 310 317 361L284 383C229 420 183 455 183 515C183 569 222 628 298 628C384 628 418 563 428 481L461 487C459 527 458 593 463 633Z" id="g50-84"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.0091,0,0,-0.0091,6.149,3.001)"><path d="M245 635C92 635 37 457 37 312C37 149 91 -12 244 -12C395 -12 449 166 449 312C449 469 395 635 245 635ZM243 598C332 598 358 454 358 312C358 173 334 26 245 26C158 26 128 174 128 313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g 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313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g></svg>) of the <svg height="17.7545pt" id="M262" style="vertical-align:-4.362399pt" version="1.1" viewbox="-0.0498162 -13.3921 18.8281 17.7545" width="18.8281pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M463 633C453 636 427 644 417 648C388 660 349 667 316 667C183 667 100 592 100 483C100 398 176 335 223 305L259 282C321 242 358 203 358 149C358 66 301 22 234 22C110 22 70 131 57 208L24 205L28 48C51 23 128 -17 215 -17C342 -17 446 60 446 174C446 262 394 310 317 361L284 383C229 420 183 455 183 515C183 569 222 628 298 628C384 628 418 563 428 481L461 487C459 527 458 593 463 633Z" id="g50-84"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.0091,0,0,-0.0091,6.214,-6.875)"><path d="M309 -142C211 -61 151 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159 383 126 359L131 330C159 344 187 357 222 368L109 -147C96 -204 80 -214 18 -223L13 -255L256 -244L259 -212L236 -210C184 -205 180 -195 191 -141L219 -1C240 -10 268 -12 284 -12C352 4 431 48 484 104C543 166 573 240 573 302ZM481 290C481 165 381 37 305 37C280 37 249 56 235 71L302 395C328 399 353 402 372 402C427 402 481 378 481 290Z" id="g50-113"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="597" vert-adv-y="597"></glyph.data></g><g transform="matrix(.013,0,0,-0.013,11.438,0)"><path d="M556 331V384H55V331H556ZM556 140V193H55V140H556Z" id="g54-34"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="611" vert-adv-y="611"></glyph.data></g><g transform="matrix(.013,0,0,-0.013,23.056,0)"><path d="M389 0V32C297 38 291 46 291 118V635C234 613 175 595 109 583V556L161 554C203 552 207 547 207 497V118C207 46 201 38 110 32V0H389Z" id="g50-50"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g 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(b) displays the analytical probability density function of GBM, for the same parameters values and a standard Monte Carlo sampling of size <svg height="8.54217pt" id="M264" style="vertical-align:-0.2063894pt" version="1.1" viewbox="-0.0498162 -8.33578 25.5186 8.54217" width="25.5186pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M158 548H390L417 615L410 623H122L83 318C105 326 143 337 185 337C296 337 350 275 350 188C350 116 308 42 225 42C164 42 122 74 100 93C90 101 82 99 72 92C60 82 51 68 50 59C48 46 52 38 66 24C82 9 125 -12 172 -12C225 -11 292 15 346 59C408 108 437 166 437 226C437 309 371 397 242 397C214 397 170 382 133 369L158 548Z" id="g50-54"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.013,0,0,-0.013,6.331,0)"><path d="M245 635C92 635 37 457 37 312C37 149 91 -12 244 -12C395 -12 449 166 449 312C449 469 395 635 245 635ZM243 598C332 598 358 454 358 312C358 173 334 26 245 26C158 26 128 174 128 313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.013,0,0,-0.013,12.662,0)"><path d="M245 635C92 635 37 457 37 312C37 149 91 -12 244 -12C395 -12 449 166 449 312C449 469 395 635 245 635ZM243 598C332 598 358 454 358 312C358 173 334 26 245 26C158 26 128 174 128 313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.013,0,0,-0.013,18.993,0)"><path d="M245 635C92 635 37 457 37 312C37 149 91 -12 244 -12C395 -12 449 166 449 312C449 469 395 635 245 635ZM243 598C332 598 358 454 358 312C358 173 334 26 245 26C158 26 128 174 128 313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g></svg> of the GBM-analytical solution.</div>

Journal of Probability and Statistics

Polynomial Chaos Expansion Approach to Interest Rate Models

Figure 7