Simulation of Conditional Expectations Under Fast Mean-Reverting Stochastic Volatility Models

DOI10.1007/978-3-030-98319-2_11MaRDI QIDQ6154295zbMATH OpenOpenAlexFDO

Authors C. Reisinger

Publication date 14 February 2024

Published in Springer Proceedings in Mathematics & Statistics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2012.09726

zbMATH Keywords

ergodicitymultiple time scalescommon noisestochastic filteringparticle systemsbasket credit derivatives

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Dynamical systems and their relations with probability theory and stochastic processes (37A50)

Abstract: In this short paper, we study the simulation of a large system of stochastic processes subject to a common driving noise and fast mean-reverting stochastic volatilities. This model may be used to describe the firm values of a large pool of financial entities. We then seek an efficient estimator for the probability of a default, indicated by a firm value below a certain threshold, conditional on common factors. We consider approximations where coefficients containing the fast volatility are replaced by certain ergodic averages (a type of law of large numbers), and study a correction term (of central limit theorem-type). The accuracy of these approximations is assessed by numerical simulation of pathwise losses and the estimation of payoff functions as they appear in basket credit derivatives.

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Cites work

• scientific article; zbMATH DE number 765034 (Why is no real title available?)
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• Fast mean-reversion asymptotics for large portfolios of stochastic volatility models
• MEAN-REVERTING STOCHASTIC VOLATILITY
• Multilevel simulation of functionals of Bernoulli random variables with application to basket credit derivatives
• Multiple time scales and the exponential Ornstein–Uhlenbeck stochastic volatility model
• Multiscale Stochastic Volatility Asymptotics
• Sharp regularity near an absorbing boundary for solutions to second order SPDEs in a half-line with constant coefficients
• Stochastic evolution equations for large portfolios of stochastic volatility models
• Stochastic evolution equations in portfolio credit modelling
• Stochastic finite differences and multilevel Monte Carlo for a class of SPDEs in finance

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