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Strong Taylor approximation of stochastic differential equations and application to the Lévy LIBOR model

In this article we develop a method for the strong approximation of stochastic differential equations (SDEs) driven by Lévy processes or general semimartingales. The main ingredients of our method is the perturbation of the SDE and the Taylor expansion of the resulting parameterized curve. We apply this method to develop strong approximation schemes for LIBOR market models. In particular, we derive fast and precise algorithms for the valuation of derivatives in LIBOR models which are more tractable than the simulation of the full SDE. A numerical example for the Lévy LIBOR model illustrates our method.