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Estimating option prices using multilevel particle filters

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  • P. P. Osei
  • A. Jasra

Abstract

Option valuation problems are often solved using standard Monte Carlo (MC) methods. These techniques can often be enhanced using several strategies especially when one discretizes the dynamics of the underlying asset, of which we assume follows a diffusion process. We consider the combination of two methodologies in this direction. The first is the well-known multilevel Monte Carlo (MLMC) method, which is known to reduce the computational effort to achieve a given level of mean square error relative to MC in some cases. Sequential Monte Carlo (or the particle filter (PF)) methods have also been shown to be beneficial in many option pricing problems potentially reducing variances by large magnitudes (relative to MC). We propose a multilevel particle filter (MLPF) as an alternative approach to price options. The computational savings obtained in using MLPF over PF for pricing both vanilla and exotic options is demonstrated via numerical simulations.

Suggested Citation

  • P. P. Osei & A. Jasra, 2018. "Estimating option prices using multilevel particle filters," Papers 1806.01734, arXiv.org.
  • Handle: RePEc:arx:papers:1806.01734
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    References listed on IDEAS

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    1. Paul Glasserman & Jeremy Staum, 2001. "Conditioning on One-Step Survival for Barrier Option Simulations," Operations Research, INFORMS, vol. 49(6), pages 923-937, December.
    2. Deborshee Sen & Ajay Jasra & Yan Zhou, 2016. "Some Contributions to Sequential Monte Carlo Methods for Option Pricing," Papers 1608.03352, arXiv.org.
    3. Michael B. Giles, 2008. "Multilevel Monte Carlo Path Simulation," Operations Research, INFORMS, vol. 56(3), pages 607-617, June.
    4. Ajay Jasra & David A. Stephens & Arnaud Doucet & Theodoros Tsagaris, 2011. "Inference for Lévy‐Driven Stochastic Volatility Models via Adaptive Sequential Monte Carlo," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 38(1), pages 1-22, March.
    5. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
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