Least Squares Importance Sampling for Libor Market Models

Details Least Squares Importance Sampling for Libor Market Models Least Squares Importance Sampling for Libor Market Models

2007-11-01

arxiv.org/abs/0711.0223v1

Wilmott Magazine, September 2007

Economy

Quantitative Finance

Pricing of Securities

14 pages, 1 figure

Scientific paper

A recently introduced Importance Sampling strategy based on a least squares optimization is applied to the Monte Carlo simulation of Libor Market Models. Such Least Squares Importance Sampling (LSIS) allows the automatic optimization of the sampling distribution within a trial class by means of a quick presimulation algorithm of straightforward implementation. With several numerical examples we show that LSIS can be extremely effective in reducing the variance of Monte Carlo estimators often resulting, especially when combined with stratified sampling, in computational speed-ups of orders of magnitude.

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