The optimal free knot spline approximation of stochastic differential equations with additive noise

Abstract: In this paper we analyse the pathwise approximation of stochastic differential equations by polynomial splines with free knots. The pathwise distance between the solution and its approximation is measured globally on the unit interval in the $L_{\infty}$-norm, and we study the expectation of this distance. For equations with additive noise we obtain sharp lower and upper bounds for the minimal error in the class of arbitrary spline approximation methods, which use $k$ free knots. The optimal order is achieved by an approximation method $\hat{X}_{k}^{\dagger}$, which combines an Euler scheme on a coarse grid with an optimal spline approximation of the Brownian motion $W$ with $k$ free knots.