Branching particle pricers with Heston examples

DOI10.1142/S021902492050003XzbMATH Open1443.91296arXiv1907.00219OpenAlexW2995480943WikidataQ126560077 ScholiaQ126560077MaRDI QIDQ5221479FDOQ5221479

Authors: Michael A. Kouritzin, Anne MacKay 

Publication date: 26 March 2020

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: The use of sequential Monte Carlo within simulation for path-dependent option pricing is proposed and evaluated. Recently, it was shown that explicit solutions and importance sampling are valuable for efficient simulation of spot price and volatility, especially for purposes of path-dependent option pricing. The resulting simulation algorithm is an analog to the weighted particle filtering algorithm that might be improved by resampling or branching. Indeed, some branching algorithms are shown herein to improve pricing performance substantially while some resampling algorithms are shown to be less suitable in certain cases. A historical property is given and explained as the distinguishing feature between the sequential Monte Carlo algorithms that work on path-dependent option pricing and those that do not. In particular, it is recommended to use the so-called effective particle branching algorithm within importance-sampling Monte Carlo methods for path-dependent option pricing. All recommendations are based upon numeric comparison of option pricing problems in the Heston model.

Full work available at URL: https://arxiv.org/abs/1907.00219

Recommendations

• Sequential Monte Carlo methods for option pricing
• Explicit Heston solutions and stochastic approximation for path-dependent option pricing
• A backward Monte Carlo approach to exotic option pricing
• Some contributions to sequential Monte Carlo methods for option pricing
• LOCALIZED MONTE CARLO ALGORITHM TO COMPUTE PRICES OF PATH DEPENDENT OPTIONS ON TREES

zbMATH Keywords

sequential Monte Carlostochastic approximationAmerican optionsbranching processesHeston model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40) Stochastic models in economics (91B70)

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Cited In (5)

• Combined multiplicative-Heston model for stochastic volatility
• On explicit local solutions of Itô diffusions
• Explicit Heston solutions and stochastic approximation for path-dependent option pricing
• Explicit solution simulation method for the 3/2 model
• Some contributions to sequential Monte Carlo methods for option pricing

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