Addressing the bias in Monte Carlo pricing of multi-asset options with multiple barriers through discrete sampling

Details Addressing the bias in Monte Carlo pricing of multi-asset options with multiple barriers through discrete sampling Addressing the bias in Monte Carlo pricing of multi-asset options with multiple barriers through discrete sampling

2009-04-07

arxiv.org/abs/0904.1157v1

The Journal of Computational Finance 6(3), pp.1-20, 2003. www.journalofcomputationalfinance.com

Economy

Quantitative Finance

Computational Finance

Scientific paper

An efficient conditioning technique, the so-called Brownian Bridge simulation, has previously been applied to eliminate pricing bias that arises in applications of the standard discrete-time Monte Carlo method to evaluate options written on the continuous-time extrema of an underlying asset. It is based on the simple and easy to implement analytic formulas for the distribution of one-dimensional Brownian Bridge extremes. This paper extends the technique to the valuation of multi-asset options with knock-out barriers imposed for all or some of the underlying assets. We derive formula for the unbiased option price estimator based on the joint distribution of the multi-dimensional Brownian Bridge dependent extrema. As analytic formulas are not available for the joint distribution in general, we develop upper and lower biased option price estimators based on the distribution of independent extrema and the Fr\'echet lower and upper bounds for the unknown distribution. All estimators are simple and easy to implement. They can always be used to bind the true value by a confidence interval. Numerical tests indicate that our biased estimators converge rapidly to the true option value as the number of time steps for the asset path simulation increases in comparison to the estimator based on the standard discrete-time method. The convergence rate depends on the correlation and barrier structures of the underlying assets.

Affiliated with

Also associated with

No associations

Rating

Addressing the bias in Monte Carlo pricing of multi-asset options with multiple barriers through discrete sampling does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Addressing the bias in Monte Carlo pricing of multi-asset options with multiple barriers through discrete sampling, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Addressing the bias in Monte Carlo pricing of multi-asset options with multiple barriers through discrete sampling will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-314353