This paper develops a variance reduction technique for Monte Carlo simulations of path-dependent options driven by high-dimensional Gaussian vectors. The method combines " importance sampling" based on a change of drift with "stratified sampling" along a small number of key dimensions. The...

The payoff of a " barrier option" depends on whether or not a specified asset price, index, or rate reaches a specified level during the life of the option. Most models for pricing barrier options assume continuous monitoring of the barrier; under this assumption, the option can often be priced...

This paper develops efficient methods for computing portfolio value-at-risk (VAR) when the underlying risk factors have a heavy-tailed distribution. In modeling heavy tails, we focus on multivariate "t" distributions and some extensions thereof. We develop two methods for VAR calculation that...

Monte Carlo simulation is widely used to measure the credit risk in portfolios of loans, corporate bonds, and other instruments subject to possible default. The accurate measurement of credit risk is often a rare-event simulation problem because default probabilities are low for highly rated...

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We derive and analyze Monte Carlo estimators of price sensitivities ("Greeks") for contingent claims priced in a diffusion model. There have traditionally been two categories of methods for estimating sensitivities: methods that differentiate paths and methods that differentiate densities. A...

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses and defaults under a wide range of shock distributions. In contrast to most work on...

This paper develops a method for selecting and analysing stress scenarios for financial risk assessment, with particular emphasis on identifying sensible combinations of stresses to multiple factors. We focus primarily on reverse stress testing - finding the most likely scenarios leading to...

This paper develops methods for relating the prices of discrete- and continuous-time versions of path-dependent options sensitive to extremal values of the underlying asset, including lookback, barrier, and hindsight options. The relationships take the form of correction terms that can be...