New Second-order Convergent Schemes for Solving decoupled FBSDEs

TL;DR

This paper introduces a second-order symmetric splitting algorithm for decoupled FBSDEs, improving computational efficiency while maintaining high accuracy, especially for equations with linear and nonlinear generator parts.

Contribution

The paper develops a novel second-order symmetric splitting scheme inspired by PDE methods, reducing iterations and computational cost for solving decoupled FBSDEs.

Findings

The new schemes achieve second-order convergence.

Numerical examples confirm reduced computational cost.

Method effectively handles equations with linear and nonlinear generator parts.

Abstract

This paper proposes a new second-order symmetric algorithm for solving decoupled forward-backward stochastic differential equations. Inspired by the alternating direction implicit splitting method for partial differential equations, we split the generator into the sum of two functions. In the computation of the value process Y, explicit and implicit schemes are alternately applied to these two generators, while the algorithms from \citep{ZhaoLi2014} are used for the control process Z. We rigorously prove that the two new schemes have second-order convergence rate. The proposed splitting methods show clear advantages for equations whose generator consists of a linear part plus a nonlinear part, as they reduce the number of iterations required for solving implicit schemes, thereby decreasing computational cost while maintaining second-order convergence. Two numerical examples are provided, including the backward stochastic Riccati equation arising in mean-variance hedging. The numerical results verify the theoretical error analysis and demonstrate the advantage of reduced computational cost compared to the algorithm in \citep{ZhaoLi2014}.