Large and moderate deviations for importance sampling in the Heston model

DOI10.1007/S10479-023-05424-0MaRDI QIDQ6381761zbMATH OpenFDO

Authors Marc Geha, Antoine Jacquier, Žan Žurič

Publication date 30 October 2021

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.1007/S10479-023-05424-0

Mathematics Subject Classification ID

Large deviations (60F10) Monte Carlo methods (65C05) Stochastic models in economics (91B70) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We provide a detailed importance sampling analysis for variance reduction in stochastic volatility models. The optimal change of measure is obtained using a variety of results from large and moderate deviations: small-time, large-time, small-noise. Specialising the results to the Heston model, we derive many closed-form solutions, making the whole approach easy to implement. We support our theoretical results with a detailed numerical analysis of the variance reduction gains.

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Cited in

(1)

• On sample-path moderate deviation principles for random walks

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