Branching particle pricers with Heston examples

DOI10.1142/S021902492050003XMaRDI QIDQ5221479zbMATH OpenOpenAlexWikidataFDO

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)

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

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)

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.

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

Cites work

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Cited in

(5)

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

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