A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton with Jumps
AbstractThis paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process and within the Markovian HJM framework developed in Chiarella & Nikitopoulos (2003). Closed form solutions for the price of a bond option under deterministic volatility specifications are derived and a control variate numerical method is developed under a more general state dependent volatility structure, a case in which closed form solutions are generally not possible. In doing so, we provide a novel perspective on the control variate methods by going outside a given complex model to a simpler more tractable setting to provide the control variates.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 167.
Date of creation: 01 Sep 2005
Date of revision:
HJM model; jump process; bond option prices; control variate; Monte Carlo simulation;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-29 (All new papers)
- NEP-CMP-2005-10-29 (Computational Economics)
- NEP-FIN-2005-10-29 (Finance)
- NEP-MAC-2005-10-29 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Research Paper Series
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