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

DOI10.1007/978-3-030-98319-2_11arXiv2012.09726OpenAlexW3113119849MaRDI QIDQ6154295FDOQ6154295

Authors: C. Reisinger 

Publication date: 14 February 2024

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

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.

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

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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)

Cites Work

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• Stochastic evolution equations for large portfolios of stochastic volatility models
• Fast mean-reversion asymptotics for large portfolios of stochastic volatility models
• Multiple time scales and the exponential Ornstein–Uhlenbeck stochastic volatility model

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