Computer Science – Computational Engineering – Finance – and Science
Scientific paper
2007-02-28
Computer Science
Computational Engineering, Finance, and Science
Keywords: Monte-Carlo simulations, first passage time, multivariate jump-diffusion process; 10 pages, 3 figures
Scientific paper
The ``first passage-time'' (FPT) problem is an important problem with a wide range of applications in mathematics, physics, biology and finance. Mathematically, such a problem can be reduced to estimating the probability of a (stochastic) process first to reach a critical level or threshold. While in other areas of applications the FPT problem can often be solved analytically, in finance we usually have to resort to the application of numerical procedures, in particular when we deal with jump-diffusion stochastic processes (JDP). In this paper, we develop a Monte-Carlo-based methodology for the solution of the FPT problem in the context of a multivariate jump-diffusion stochastic process. The developed methodology is tested by using different parameters, the simulation results indicate that the developed methodology is much more efficient than the conventional Monte Carlo method. It is an efficient tool for further practical applications, such as the analysis of default correlation and predicting barrier options in finance.
Melnik Roderick V. N.
Zhang Di
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