Applications of Malliavin calculus to Monte-Carlo methods in finance. II

Eric Fournié, Jean-Michel Lasry, Pierre-Louis Lions () and Jérôme Lebuchoux
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Eric Fournié: PARIBAS Capital Markets, 10, Harewood Avenue, NW1 6AA London, England
Jean-Michel Lasry: PARIBAS Capital Markets, 10, Harewood Avenue, NW1 6AA London, England
Pierre-Louis Lions: Ceremade, UMR 9534, Université Paris-Dauphine, Place Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France
Jérôme Lebuchoux: PARIBAS Capital Markets, 10, Harewood Avenue, NW1 6AA London, England

Finance and Stochastics, 2001, vol. 5, issue 2, 236 pages

Abstract: This paper is the sequel of Part I [1], where we showed how to use the so-called Malliavin calculus in order to devise efficient Monte-Carlo (numerical) methods for Finance. First, we return to the formulas developed in [1] concerning the "greeks" used in European options, and we answer to the question of optimal weight functional in the sense of minimal variance. Then, we investigate the use of Malliavin calculus to compute conditional expectations. The integration by part formula provides a powerful tool when used in the framework of Monte Carlo simulation. It allows to compute everywhere, on a single set of trajectories starting at one point, solution of general options related PDEs. Our final application of Malliavin calculus concerns the use of Girsanov transforms involving anticipating drifts. We give an example in numerical Finance of such a transform which gives reduction of variance via importance sampling. Finally, we include two appendices that are concerned with the PDE interpretation of the formulas presented in [1] for the delta of a European option and with the connections between the functional dependence of some random variables and their Malliavin derivatives.

Keywords: Monte Carlo methods; Malliavin calculus; hedge ratios and greeks; conditional expectations; PDE; anticipative Girsanov transform; functional dependence (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2001-04-10
Note: received: February 1999; final version received: January 2000
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Citations: View citations in EconPapers (64)

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