A variance reduction technique based on integral representations
Standard Monte Carlo methods can often be significantly improved with the addition of appropriate variance reduction techniques. In this paper a new and powerful variance reduction technique is presented. The method is based directly on the Ito calculus and is used to find unbiased variance-reduced estimators for the expectation of functionals of Ito diffusion processes. The approach considered has wide applicability: for instance, it can be used as a means of approximating solutions of parabolic partial differential equations or applied to valuation problems that arise in mathematical finance. We illustrate how the method can be applied by considering the pricing of European-style derivative securities for a class of stochastic volatility models, including the Heston model.
Year of publication: |
2002
|
---|---|
Authors: | Heath, David ; Platen, Eckhard |
Published in: |
Quantitative Finance. - Taylor & Francis Journals, ISSN 1469-7688. - Vol. 2.2002, 5, p. 362-369
|
Publisher: |
Taylor & Francis Journals |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Currency derivatives under a minimal market model with random scaling
Heath, David C., (2005)
-
A benchmark approach to quantitative finance
Platen, Eckhard, (2010)
-
A Monte Carlo method using PDE expansions for a diversifed equity index model
Heath, David C., (2014)
- More ...