A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton with Jumps

Carl Chiarella (), Christina Nikitopoulos-Sklibosios () and Erik Schlogl ()

No 167, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process and within the Markovian HJM framework developed in Chiarella & Nikitopoulos (2003). Closed form solutions for the price of a bond option under deterministic volatility specifications are derived and a control variate numerical method is developed under a more general state dependent volatility structure, a case in which closed form solutions are generally not possible. In doing so, we provide a novel perspective on the control variate methods by going outside a given complex model to a simpler more tractable setting to provide the control variates.

Keywords: HJM model; jump process; bond option prices; control variate; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: E43 G33 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-fin and nep-mac
Date: 2005-09-01
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Persistent link: http://EconPapers.repec.org/RePEc:uts:rpaper:167

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