On exact sampling of stochastic perpetuities

Abstract

A stochastic perpetuity takes the formD∞=∑n=0∞exp(Y1+⋯+Yn)Bn, whereYn:n≥0) and (Bn:n≥0) are two independent sequences of independent and identically distributed random variables (RVs). This is an expression for the stationary distribution of the Markov chain defined recursively byDn+1=AnDn+Bn,n≥0, whereAn=eYn;D∞then satisfies the stochastic fixed-point equationD∞D̳AD∞+B, whereAandBare independent copies of theAnandBn(and independent ofD∞on the right-hand side). In our framework, the quantityBn, which represents a random reward at timen, is assumed to be positive, unbounded with EBnp<∞ for somep>0, and have a suitably regular continuous positive density. The quantityYnis assumed to be light tailed and represents a discount rate from timenton-1. The RVD∞then represents the net present value, in a stochastic economic environment, of an infinite stream of stochastic rewards. We provide an exact simulation algorithm for generating samples ofD∞. Our method is a variation ofdominated coupling from the pastand it involves constructing a sequence of dominating processes.