Non-parametric partial importance sampling for financial derivative pricing

DOI10.1080/14697680903496485MaRDI QIDQ5300444zbMATH OpenOpenAlexFDO

Authors Jan C. Neddermeyer

Publication date 27 June 2013

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0806.0539

zbMATH Keywords

financial engineeringMonte Carlo methodsoption pricing via simulationpath-dependent optionspricing of derivatives securities

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: Importance sampling is a promising variance reduction technique for Monte Carlo simulation based derivative pricing. Existing importance sampling methods are based on a parametric choice of the proposal. This article proposes an algorithm that estimates the optimal proposal nonparametrically using a multivariate frequency polygon estimator. In contrast to parametric methods, nonparametric estimation allows for close approximation of the optimal proposal. Standard nonparametric importance sampling is inefficient for high-dimensional problems. We solve this issue by applying the procedure to a low-dimensional subspace, which is identified through principal component analysis and the concept of the effective dimension. The mean square error properties of the algorithm are investigated and its asymptotic optimality is shown. Quasi-Monte Carlo is used for further improvement of the method. It is easy to implement, particularly it does not require any analytical computation, and it is computationally very efficient. We demonstrate through path-dependent and multi-asset option pricing problems that the algorithm leads to significant efficiency gains compared to other algorithms in the literature.

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Cites work

• A theory of the term structure of interest rates
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• Computationally efficient nonparametric importance sampling
• Least-squares Importance Sampling for Monte Carlo security pricing
• Local Adaptive Importance Sampling for Multivariate Densities With Strong Nonlinear Relationships
• Mersenne twister
• Nonparametric Importance Sampling
• On the \(L_2\)-discrepancy for anchored boxes
• Randomized quasi-Monte Carlo methods in pricing securities
• The effective dimension and quasi-Monte Carlo integration
• Toward real-time pricing of complex financial derivatives

Cited in

(7)

• On sample average approximation algorithms for determining the optimal importance sampling parameters in pricing financial derivatives on Lévy processes
• On accelerating Monte Carlo integration using orthogonal projections
• Single-index importance sampling with stratification
• scientific article; zbMATH DE number 1054684 (Why is no real title available?)
• On an automatic and optimal importance sampling approach with applications in finance
• An efficient exponential twisting importance sampling technique for pricing financial derivatives
• Efficient Importance Sampling in Quasi-Monte Carlo Methods for Computational Finance

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