A hybrid Monte Carlo acceleration method of pricing basket options based on splitting (Q1639548)

This paper proposes a hybrid variance reduction method, which combines the control variate (CV) method, conditional Monte Carlo (CMC) and importance sampling (IS) method altogether to get better variance reduction effect for pricing basket options. More precisely, some idea given by \textit{M. Curran} [Manage. Sci. 40, No. 12, 1705--1711 (1994; Zbl 0824.90012)] is used to split the payoff of the basket options into two parts, which can be considered as a CV method to reduce variance of simulation. The first part has a closed-form expectation formula, the second part can be considered as a small probability event. To reduce variance for simulating the second part, the conditional Monte Carlo (CMC) method combined with the importance sampling (IS) method is adapted. Section 3 proposed the new hybrid variance reduction method for basket options, some essential formulas and theory analysis are derived. Numerical results for seven-dimensional basket option are given in Section 4.