A Variance Reduction Technique Based on Integral Representations
AbstractStandard Monte Carlo methods can often be significantly improved with the addition of appropriate variance reduction techniques. In this paper a new and powerful variance reduction technique is presented. The method is based directly on the Ito calculus and is used to find unbiased variance reduced estimators for the expectation of functionals of Ito diffusion processes. The approach considered has wide applicability, for instance, it can be used as a means of approximating solutions of parabolic partial differential equations or applied to valuation problems that arise in mathematical finance. We illustrate how the method can be applied by considering the pricing of European style derivative securities for a class of stochastic volatility models, including the Heston model.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 75.
Date of creation: 01 Mar 2002
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monte carlo method; variance reduction; stochastic volatility; heston model;
Other versions of this item:
- David Heath & Eckhard Platen, 2002. "A variance reduction technique based on integral representations," Quantitative Finance, Taylor and Francis Journals, vol. 2(5), pages 362-369.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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