Multilevel Monte Carlo simulation for Lévy processes based on the Wiener-Hopf factorisation

DOI10.1016/J.SPA.2013.09.015zbMATH Open1321.65004arXiv1210.5868OpenAlexW2090311352MaRDI QIDQ2434751FDOQ2434751

Authors: Yanyan Li 

Publication date: 7 February 2014

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: In Kuznetsov et al. (2011) a new Monte Carlo simulation technique was introduced for a large family of Levy processes that is based on the Wiener-Hopf decomposition. We pursue this idea further by combining their technique with the recently introduced multilevel Monte Carlo methodology. Moreover, we provide here for the first time a theoretical analysis of the new Monte Carlo simulation technique in Kuznetsov et al. (2011) and of its multilevel variant for computing expectations of functions depending on the historical trajectory of a Levy process. We derive rates of convergence for both methods and show that they are uniform with respect to the "jump activity" (e.g. characterised by the Blumenthal-Getoor index). We also present a modified version of the algorithm in Kuznetsov et al. (2011) which combined with the multilevel methodology obtains the optimal rate of convergence for general Levy processes and Lipschitz functionals. This final result is only a theoretical one at present, since it requires independent sampling from a triple of distributions which is currently only possible for a limited number of processes.

Full work available at URL: https://arxiv.org/abs/1210.5868

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zbMATH Keywords

Monte Carlo simulationmultilevel Monte Carlobarrier optionsWiener-Hopf decompositionLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Monte Carlo methods (65C05) Numerical methods (including Monte Carlo methods) (91G60)

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Cited In (16)

• An Euler-Poisson scheme for Lévy driven stochastic differential equations
• Thinning and multilevel Monte Carlo methods for piecewise deterministic (Markov) processes with an application to a stochastic Morris–Lecar model
• AN ANALYTIC RECURSIVE METHOD FOR OPTIMAL MULTIPLE STOPPING: CANADIZATION AND PHASE-TYPE FITTING
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• Optimal importance sampling for Lévy processes
• Geometrically Convergent Simulation of the Extrema of Lévy Processes
• Multilevel Monte Carlo for exponential Lévy models
• Simulation of the drawdown and its duration in Lévy models via stick-breaking Gaussian approximation

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