Simulation of the drawdown and its duration in Lévy models via stick-breaking Gaussian approximation
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Publication:2675813
DOI10.1007/S00780-022-00486-7zbMATH Open1498.91494arXiv2011.06618OpenAlexW4298140476WikidataQ114228726 ScholiaQ114228726MaRDI QIDQ2675813FDOQ2675813
Aleksandar Mijatović, Jorge González Cázares
Publication date: 26 September 2022
Published in: Finance and Stochastics (Search for Journal in Brave)
Abstract: We develop a computational method for expected functionals of the drawdown and its duration in exponential L'evy models. It is based on a novel simulation algorithm for the joint law of the state, supremum and time the supremum is attained of the Gaussian approximation of a general L'evy process. We bound the bias for various locally Lipschitz and discontinuous payoffs arising in applications and analyse the computational complexities of the corresponding Monte Carlo and multilevel Monte Carlo estimators. Monte Carlo methods for L'evy processes (using Gaussian approximation) have been analysed for Lipschitz payoffs, in which case the computational complexity of our algorithm is up to two orders of magnitude smaller when the jump activity is high. At the core of our approach are bounds on certain Wasserstein distances, obtained via the novel SBG coupling between a L'evy process and its Gaussian approximation. Numerical performance, based on the implementation in the dedicated GitHub repository, exhibits a good agreement with our theoretical bounds.
Full work available at URL: https://arxiv.org/abs/2011.06618
Gaussian approximationsimulationmultilevel Monte Carlobarrier optionsdrawdownduration of drawdownWasserstein and Kolmogorov bounds for maximum and the time maximum is attainedLévy models
Processes with independent increments; Lévy processes (60G51) Monte Carlo methods (65C05) Extreme value theory; extremal stochastic processes (60G70) Numerical methods (including Monte Carlo methods) (91G60)
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