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A Comparison Of Gradient Estimation Techniques For European Call Options

Author

Listed:
  • Lingyan Cao
  • Zheng-Feng Guo

Abstract

Assuming the underlying assets follow a Variance-Gamma (VG) process, we consider the problem of estimating gradients of a European call option by Monte Carlo simulation methods. In this paper, we compare indirect methods (finite difference techniques such as forward differences) and two direct methods, infinitesimal perturbation analysis (IPA) and likelihood ratio (LR) method. We conduct simulation experiments to evaluate the efficiency of different estimators and discuss the advantage and disadvantage of each method.

Suggested Citation

  • Lingyan Cao & Zheng-Feng Guo, 2012. "A Comparison Of Gradient Estimation Techniques For European Call Options," Accounting & Taxation, The Institute for Business and Finance Research, vol. 4(1), pages 75-81.
    • Handle: RePEc:ibf:acttax:v:4:y:2012:i:1:p:75-81
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    References listed on IDEAS

    as
    1. Dilip B. Madan & Frank Milne, 1991. "Option Pricing With V. G. Martingale Components1," Mathematical Finance, Wiley Blackwell, vol. 1(4), pages 39-55, October.
    2. Dilip B. Madan & Frank Milne, 1991. "Option Pricing With V. G. Martingale Components," Working Paper 1159, Economics Department, Queen's University.
    3. Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-524, October.
    4. Mark Broadie & Paul Glasserman, 1996. "Estimating Security Price Derivatives Using Simulation," Management Science, INFORMS, vol. 42(2), pages 269-285, February.
    5. Michael C. Fu, 2008. "What you should know about simulation and derivatives," Naval Research Logistics (NRL), John Wiley & Sons, vol. 55(8), pages 723-736, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Greeks; IPA; LR; Variance-Gamma;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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