Exact Simulation of the 3/2 Model
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.
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.:
- Mark Craddock & Kelly A Lennox, 2006. "Lie Group Symmetries as Integral Transforms of Fundamental Solutions," Research Paper Series 183, Quantitative Finance Research Centre, University of Technology, Sydney.
- Peter Laurence & Tai-Ho Wang, 2005. "Closed Form Solutions For Quadratic And Inverse Quadratic Term Structure Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(08), pages 1059-1083.
- Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, March.
- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
- Paul Glasserman & Kyoung-Kuk Kim, 2011. "Gamma expansion of the Heston stochastic volatility model," Finance and Stochastics, Springer, vol. 15(2), pages 267-296, June.
- Andrey Itkin & Peter Carr, 2010. "Pricing swaps and options on quadratic variation under stochastic time change models—discrete observations case," Review of Derivatives Research, Springer, vol. 13(2), pages 141-176, July.
- Peter Carr & Jian Sun, 2007. "A new approach for option pricing under stochastic volatility," Review of Derivatives Research, Springer, vol. 10(2), pages 87-150, May.
- Pierre L'Ecuyer & Christiane Lemieux, 2000. "Variance Reduction via Lattice Rules," Management Science, INFORMS, vol. 46(9), pages 1214-1235, September.
- Ahn, Dong-Hyun & Gao, Bin, 1999. "A Parametric Nonlinear Model of Term Structure Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 721-762.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1105.3297. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.