Multilevel simulation of functionals of Bernoulli random variables with application to basket credit derivatives

DOI10.1007/S11009-013-9380-5zbMATH Open1327.65003arXiv1211.0707OpenAlexW2963159856MaRDI QIDQ496948FDOQ496948

Authors: K. Bujok, Ben M. Hambly, C. Reisinger 

Publication date: 23 September 2015

Published in: Methodology and Computing in Applied Probability (Search for Journal in Brave)

Abstract: We consider $N$ Bernoulli random variables, which are independent conditional on a common random factor determining their probability distribution. We show that certain expected functionals of the proportion $L_N$ of variables in a given state converge at rate $1/N$ as $Nightarrowinfty$. Based on these results, we propose a multi-level simulation algorithm using a family of sequences with increasing length, to obtain estimators for these expected functionals with a mean-square error of $epsilo{n}^2$ and computational complexity of order $epsilo{n}^{-2}$, independent of $N$. In particular, this optimal complexity order also holds for the infinite-dimensional limit. Numerical examples are presented for tranche spreads of basket credit derivatives.

Full work available at URL: https://arxiv.org/abs/1211.0707

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zbMATH Keywords

exchangeabilitylarge deviations principlebasket credit derivativesmultilevel Monte Carlo simulation

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Large deviations (60F10) Numerical methods (including Monte Carlo methods) (91G60) Credit risk (91G40)

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• Iterative multilevel particle approximation for McKean-Vlasov SDEs
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• Limit theorems for weighted and regular multilevel estimators
• Unbiased MLMC stochastic gradient-based optimization of Bayesian experimental designs
• Well-posedness and tamed schemes for McKean-Vlasov equations with common noise
• Constructing unbiased gradient estimators with finite variance for conditional stochastic optimization

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