1 Department of Mathematical Sciences, Faculty of Science, Københavns Universitet2 George Mason University, Fairfax3 George Mason University, Arlington4 Department of Mathematical Sciences, Faculty of Science, Københavns Universitet
In a number of applications, particularly in financial and actuarial mathematics, it is of interest to characterize the tail distribution of a random variable V satisfying the distributional equation V=_D f(V), for some random function f. This paper is concerned with computational methods for evaluating these tail probabilities. We introduce a novel importance sampling algorithm, involving an exponential shift over a random time interval, for estimating these rare event probabilities. We prove that the proposed estimator is: (i) consistent, (ii) strongly efficient and (iii) optimal within a wide class of dynamic importance sampling estimators. Moreover, using extensions of ideas from nonlinear renewal theory, we provide a precise description of the running time of the algorithm. To establish these results, we develop new techniques concerning the convergence of moments of stopped perpetuity sequences, and the first entrance and least exit time of associated Markov chains on R. We illustrate our methods with a variety of numerical examples which demonstrate the ease and scope of the implementation.
Annals of Applied Probability, 2014, Vol 24, Issue 5, p. 2143-2175