EXACT SIMULATION OF THE 3/2 MODEL

Jan Baldeaux ()
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Jan Baldeaux: Finance Discipline Group, University of Technology Sydney, PO Box 123, Broadway, NSW, 2007, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 05, 1-13

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.

Keywords: Stochastic volatility model; 3/2 model; exact simulation; variance reduction techniques (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (16)

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DOI: 10.1142/S021902491250032X

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