Multilevel Path Branching for Digital Options

Authors Mike Giles, Abdul-Lateef Haji-Ali

Publication date 7 September 2022

Applications of branching processes (60J85) Acceleration of convergence in numerical analysis (65B99) Monte Carlo methods (65C05) Numerical solutions to stochastic differential and integral equations (65C30)

Abstract: We propose a new Monte Carlo-based estimator for digital options with assets modelled by a stochastic differential equation (SDE). The new estimator is based on repeated path splitting and relies on the correlation of approximate paths of the underlying SDE that share parts of a Brownian path. Combining this new estimator with Multilevel Monte Carlo (MLMC) leads to an estimator with a complexity that is similar to the complexity of a MLMC estimator when applied to options with Lipschitz payoffs.

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