A Wiener-Hopf Monte Carlo simulation technique for Lévy processes

DOI10.1214/10-AAP746zbMATH Open1245.65005arXiv0912.4743MaRDI QIDQ657695FDOQ657695

Authors: Alexey Kuznetsov, A. E. Kyprianou, J. C. Pardo, Kees van Schaik 

Publication date: 10 January 2012

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We develop a completely new and straightforward method for simulating the joint law of the position and running maximum at a fixed time of a general L'{e}vy process with a view to application in insurance and financial mathematics. Although different, our method takes lessons from Carr's so-called "Canadization" technique as well as Doney's method of stochastic bounds for L'{e}vy processes; see Carr [Rev. Fin. Studies 11 (1998) 597--626] and Doney [Ann. Probab. 32 (2004) 1545-1552]. We rely fundamentally on the Wiener-Hopf decomposition for L'{e}vy processes as well as taking advantage of recent developments in factorization techniques of the latter theory due to Vigon [Simplifiez vos L'{e}vy en titillant la factorization de Wiener-Hopf (2002) Laboratoire de Math'{e}matiques de L'INSA de Rouen] and Kuznetsov [Ann. Appl. Probab. 20 (2010) 1801--1830]. We illustrate our Wiener--Hopf Monte Carlo method on a number of different processes, including a new family of L'{e}vy processes called hypergeometric L'{e}vy processes. Moreover, we illustrate the robustness of working with a Wiener--Hopf decomposition with two extensions. The first extension shows that if one can successfully simulate for a given L'{e}vy processes then one can successfully simulate for any independent sum of the latter process and a compound Poisson process. The second extension illustrates how one may produce a straightforward approximation for simulating the two-sided exit problem.

Full work available at URL: https://arxiv.org/abs/0912.4743

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zbMATH Keywords

numerical resultsinsurance risk theoryPoisson processexotic option pricingfinancial mathematicsrunning maximumWiener-Hopf factorizationWiener-Hopf Monte Carlo methodLévy processeshypergeomatric Lévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Monte Carlo methods (65C05) Numerical methods (including Monte Carlo methods) (91G60) Microeconomic theory (price theory and economic markets) (91B24)

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Cited In (47)

• On exact sampling of nonnegative infinitely divisible random variables
• An Euler-Poisson scheme for Lévy driven stochastic differential equations
• Deep factorisation of the stable process. II: Potentials and applications
• Weak reflection principle for Lévy processes
• More on hypergeometric Lévy processes
• New methods of simulating Lévy processes
• An insurance risk model with Parisian implementation delays
• A variation of the Canadisation algorithm for the pricing of American options driven by Lévy processes
• Closed-form option pricing for exponential Lévy models: a residue approach
• Monte Carlo method for pricing lookback type options in Lévy models
• Small-time asymptotics of stopped Lévy bridges and simulation schemes with controlled bias
• Wiener-Hopf factorization and distribution of extrema for a family of Lévy processes
• Asian options and meromorphic Lévy processes
• Asymptotic distributions of the overshoot and undershoots for the Lévy insurance risk process in the Cramér and convolution equivalent cases
• Meromorphic Lévy processes and their fluctuation identities
• Randomisation and recursion methods for mixed-exponential Lévy models, with financial applications
• Geometrically convergent simulation of the extrema of Lévy processes
• Multilevel Monte Carlo simulation for Lévy processes based on the Wiener-Hopf factorisation
• The extended hypergeometric class of Lévy processes
• Asymptotics of the maximum of Brownian motion under Erlangian sampling
• Exit identities for Lévy processes observed at Poisson arrival times
• On the Wiener-Hopf factorization for Lévy processes with bounded positive jumps
• Spitzer identity, Wiener-Hopf factorization and pricing of discretely monitored exotic options
• Applications of artificial neural networks to simulating Lévy processes
• Method of paired contours and pricing barrier options and CDSs of long maturities
• Applying the Wiener-Hopf Monte Carlo simulation technique for Lévy processes to path functionals
• On the supremum of the spectrally negative stable process with drift
• Universal Monte Carlo method for Lévy processes and their extrema
• The \(\beta\)-Meixner model
• Double hypergeometric Lévy processes and self-similarity
• Fluctuations of stable processes and exponential functionals of hypergeometric Lévy processes
• Lévy process simulation by stochastic step functions
• Approximate Wiener-Hopf factorization and Monte Carlo methods for Lévy processes
• A simple Wiener-Hopf factorization approach for pricing double-barrier options
• A fast Monte Carlo scheme for additive processes and option pricing
• The \(\beta \)-variance gamma model
• A factorization of a Lévy process over a phase-type horizon
• On the density of exponential functionals of Lévy processes
• Pricing bounds and bang-bang analysis of the Polaris variable annuities
• A Wiener-Hopf based approach to numerical computations in fluctuation theory for Lévy processes
• On the monitoring error of the supremum of a normal jump diffusion process
• Multilevel Monte Carlo for exponential Lévy models
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• An analytic recursive method for optimal multiple stopping: Canadization and phase-type fitting
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• Simulation of the drawdown and its duration in Lévy models via stick-breaking Gaussian approximation

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