Variance Reduction of Ordinary Monte-Carlo Estimates with the Brownian-Bridge Path Construction

Wilmott ◽  
2018 ◽  
Vol 2018 (96) ◽  
pp. 54-57
Author(s):  
Jherek Healy
Keyword(s):  
Monte Carlo ◽  
Variance Reduction ◽  
Brownian Bridge

scholarly journals A backward Monte Carlo approach to exotic option pricing

2017 ◽  
Vol 29 (1) ◽  
pp. 146-187 ◽  
Author(s):  
G. BORMETTI ◽  
G. CALLEGARO ◽  
G. LIVIERI ◽  
A. PALLAVICINI
Keyword(s):  
Monte Carlo ◽  
Variance Reduction ◽  
Brownian Bridge ◽  
Finite Difference Approximation ◽  
Difference Approximation ◽  
Spot Price ◽  
Exotic Options ◽  
Sample Paths ◽  
Volatility Model ◽  
Optimal Grids

We propose a novel algorithm which allows to sample paths from an underlying price process in a local volatility model and to achieve a substantial variance reduction when pricing exotic options. The new algorithm relies on the construction of a discrete multinomial tree. The crucial feature of our approach is that – in a similar spirit to the Brownian Bridge – each random path runs backward from a terminal fixed point to the initial spot price. We characterize the tree in two alternative ways: (i) in terms of the optimal grids originating from the Recursive Marginal Quantization algorithm, (ii) following an approach inspired by the finite difference approximation of the diffusion's infinitesimal generator. We assess the reliability of the new methodology comparing the performance of both approaches and benchmarking them with competitor Monte Carlo methods.

Variance Reduction for Monte Carlo Methods

2018 ◽  
Vol 482 (6) ◽  
pp. 627-630
Author(s):  
D. Belomestny ◽  
◽  
L. Iosipoi ◽  
N. Zhivotovskiy ◽  
◽  
...  
Keyword(s):  
Monte Carlo ◽  
Monte Carlo Methods ◽  
Variance Reduction
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