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Exact Simulation of the 3/2 Model

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  • Jan Baldeaux

Abstract

This paper discusses the exact simulation of the stock price process underlying the 3/2 model. Using a result derived by Craddock and Lennox using Lie Symmetry Analysis, we adapt the Broadie-Kaya algorithm for the simulation of affine processes to the 3/2 model. We also discuss variance reduction techniques and find that conditional Monte Carlo techniques combined with quasi-Monte Carlo point sets result in significant variance reductions.

Suggested Citation

  • Jan Baldeaux, 2011. "Exact Simulation of the 3/2 Model," Papers 1105.3297, arXiv.org, revised May 2011.
  • Handle: RePEc:arx:papers:1105.3297
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    File URL: http://arxiv.org/pdf/1105.3297
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    Cited by:

    1. Wendong Zheng & Yue Kuen Kwok, 2014. "Saddlepoint Approximation Methods for Pricing Derivatives on Discrete Realized Variance," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(1), pages 1-31, March.
    2. Wendong Zheng & Pingping Zeng, 2015. "Pricing timer options and variance derivatives with closed-form partial transform under the 3/2 model," Papers 1504.08136, arXiv.org.
    3. Jan Baldeaux & Dale Roberts, 2012. "Quasi-Monte Carlo methods for the Heston model," Papers 1202.3217, arXiv.org, revised May 2012.

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