Hedged Monte-Carlo: low variance derivative pricing with objective probabilities
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Publication:1591779
DOI10.1016/S0378-4371(00)00554-9zbMATH Open0971.91503arXivcond-mat/0008147MaRDI QIDQ1591779FDOQ1591779
Jean-Philippe Bouchaud, D. Sestovic, Marc Potters
Publication date: 9 January 2001
Published in: Physica A (Search for Journal in Brave)
Abstract: We propose a new `hedged' Monte-Carlo (HMC) method to price financial derivatives, which allows to determine simultaneously the optimal hedge. The inclusion of the optimal hedging strategy allows one to reduce the financial risk associated with option trading, and for the very same reason reduces considerably the variance of our HMC scheme as compared to previous methods. The explicit accounting of the hedging cost naturally converts the objective probability into the `risk-neutral' one. This allows a consistent use of purely historical time series to price derivatives and obtain their residual risk. The method can be used to price a large class of exotic options, including those with path dependent and early exercise features.
Full work available at URL: https://arxiv.org/abs/cond-mat/0008147
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Cited In (19)
- ESTIMATING RESIDUAL HEDGING RISK WITH LEAST-SQUARES MONTE CARLO
- Cross-hedging minimum return guarantees: basis and liquidity risks
- A path integral way to option pricing
- A master equation approach to option pricing
- A non-Gaussian option pricing model with skew
- Option pricing and portfolio hedging under the mixed hedging strategy
- Risk preference, option pricing and portfolio hedging with proportional transaction costs
- The skewed multifractal random walk with applications to option smiles
- Option pricing under mixed hedging strategy in time-changed mixed fractional Brownian model
- Understanding option prices
- Option pricing under residual risk and imperfect hedging
- Historical simulation approach to the estimation of stochastic discount factor models
- Option pricing and hedging with minimum local expected shortfall
- A regression-based Monte Carlo method to solve backward stochastic differential equations
- Linear regression MDP scheme for discrete backward stochastic differential equations under general conditions
- A Nonintrusive Stratified Resampler for Regression Monte Carlo: Application to Solving Nonlinear Equations
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