An introduction to multilevel Monte Carlo for option valuation

DOI10.1080/00207160.2015.1077236zbMATH Open1335.91102arXiv1505.00965OpenAlexW2964220983MaRDI QIDQ2804491FDOQ2804491

Desmond J. Higham

Publication date: 29 April 2016

Published in: International Journal of Computer Mathematics (Search for Journal in Brave)

Abstract: Monte Carlo is a simple and flexible tool that is widely used in computational finance. In this context, it is common for the quantity of interest to be the expected value of a random variable defined via a stochastic differential equation. In 2008, Giles proposed a remarkable improvement to the approach of discretizing with a numerical method and applying standard Monte Carlo. His multilevel Monte Carlo method offers an order of speed up given by the inverse of epsilon, where epsilon is the required accuracy. So computations can run 100 times more quickly when two digits of accuracy are required. The multilevel philosophy has since been adopted by a range of researchers and a wealth of practically significant results has arisen, most of which have yet to make their way into the expository literature. In this work, we give a brief, accessible, introduction to multilevel Monte Carlo and summarize recent results applicable to the task of option evaluation.

Full work available at URL: https://arxiv.org/abs/1505.00965

zbMATH Keywords

computational complexityMonte Carlovariance reductionstochastic differential equationcontrol variateoption valueEuler-Maruyama

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Numerical solutions to stochastic differential and integral equations (65C30)

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Cited In (5)

• The COS method for option valuation under the SABR dynamics
• Multilevel Monte Carlo for Asian options and limit theorems
• Antithetic multilevel Monte Carlo method for approximations of SDEs with non-globally Lipschitz continuous coefficients
• A probabilistic linear solver based on a multilevel Monte Carlo method
• Multilevel Monte Carlo for exponential Lévy models

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