Monte Carlo Euler approximations of HJM term structure financial models (Q2376868)

The authors focus on the numerical approximation of the price of financial instruments in a bond market using the Heath-Jarrow-Morton model of the form \[ \begin{aligned} df(t,\tau) & =\sum_{j=1}^{J}\sigma^{j}(t,\tau)\left( \int_{t}^{\tau} \sigma^{j}(t,s)ds\right) dt+\sum_{j=1}^{J}\sigma^{j}(t,\tau)dW^{j}(t),\quad 0\leq t\leq\tau,\\ f(0,t) & =f_{0}(\tau),\quad \tau\in[0,\tau_{\max}]. \end{aligned} \] The quantity of interest is described by the mean \(\mathbb{E}[\mathcal{F}(f)]\), where \(\mathcal{F}(f)\) is a functional. For example, for a call option on a zero coupon bond this functional is equal to \[ \mathcal{F}(f)=e^{-\int_{0}^{t_{\max}}f(s,s)ds}\max\left\{e^{-\int_{t_{\max}}^{\tau_{\max}}f(t_{\max},\tau)d\tau}-K,0\right\}. \] The authors study different error contributions arising from time and maturity discretization as well as the classical statistical error due to finite sampling.