Efficient simulation and calibration of general HJM models by splitting schemes

DOI10.1137/110860173zbMATH Open1283.91193arXiv1112.5330OpenAlexW2018140698MaRDI QIDQ2873141FDOQ2873141

Authors: Philipp Dörsek, Josef Teichmann 

Publication date: 23 January 2014

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We introduce efficient numerical methods for generic HJM equations of interest rate theory by means of high-order weak approximation schemes. These schemes allow for QMC implementations due to the relatively low dimensional integration space. The complexity of the resulting algorithm is considerably lower than the complexity of multi-level MC algorithms as long as the optimal order of QMC-convergence is guaranteed. In order to make the methods applicable to real world problems, we introduce and use the setting of weighted function spaces, such that unbounded payoffs and unbounded characteristics of the equations in question are still allowed. We also provide an implementation, where we efficiently calibrate an HJM equation to caplet data.

Full work available at URL: https://arxiv.org/abs/1112.5330

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zbMATH Keywords

quasi-Monte Carlosplitting schemeinterest rate theoryFeller conditionHeath-Jarrow-Morton equation

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Numerical methods (including Monte Carlo methods) (91G60) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Cited In (15)

• Weak convergence rates for stochastic evolution equations and applications to nonlinear stochastic wave, HJMM, stochastic Schrödinger and linearized stochastic Korteweg-de Vries equations
• A general HJM framework for multiple yield curve modelling
• An efficient analytical calibration of volatilities for HJM model
• On the valuation of interest rate products under multi-factor HJM term-structures
• High order splitting schemes with complex timesteps and their application in mathematical finance
• Kernel-based collocation methods for Heath-Jarrow-Morton models with Musiela parametrization
• Monte Carlo Euler approximations of HJM term structure financial models
• Enhancing the order of the Milstein scheme for stochastic partial differential equations with commutative noise
• Numerical integration of the Heath-Jarrow-Morton model of interest rates
• A volatility decomposition control variate technique for Monte Carlo simulations of Heath-Jarrow-Morton models
• Cubature methods for stochastic (partial) differential equations in weighted spaces
• Fast resolution of a single factor Heath-Jarrow-Morton model with stochastic volatility
• Efficient simulation methods for the quasi-Gaussian term-structure model with volatility smiles: practical applications of the KLNV-scheme
• Application of the kusuoka approximation with a tree-based branching algorithm to the pricing of interest-rate derivatives under the hjm model
• Approximation of Stochastic Nonlinear Equations of Schrödinger Type by the Splitting Method

Uses Software

• NLopt

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