Unbiased Estimation with Square Root Convergence for SDE Models

C. Rhee and P. W. Glynn

Submitted for publication

In many settings in which Monte Carlo methods are applied, there may be no known algorithm for exactly generating the random object for which an expectation is to be computed. Frequently, however, one can generate arbitrarily close approximations to the random object. We introduce a simple randomization idea for creating unbiased estimators in such a setting based on a sequence of approximations. Applying this idea to computing expectations of path functionals associated with stochastic differential equations (SDEs), we construct finite-variance unbiased estimators with a “square root convergence rate” for a general class of multi-dimensional SDEs. We then identify the optimal randomization distribution. Numerical experiments with various path functionals of continuous-time processes that often arise in finance illustrate the effectiveness of our new approach.