AN ADAPTIVE METHOD FOR EVALUATING MULTIDIMENSIONAL CONTINGENT CLAIMS: PART II

Lars O. Dahl ()
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Lars O. Dahl: Storebrand Investments, PO Box 1380, N–0114 Oslo, Norway

International Journal of Theoretical and Applied Finance (IJTAF), 2003, vol. 06, issue 04, 327-353

Abstract: This is part two of a work on adaptive integration methods aimed at multidimensional option pricing problems in finance. It presents simulation results of an adaptive method developed in the companion article [3] for the evaluation of multidimensional integrals over the unit cube. The article focuses on a rather general test problem constructed to give insights in the success of the adaptive method for option pricing problems. We establish a connection between the decline rate of the ordered eigenvalues of the pricing problem and the efficiency of the adaptive method relative to the non-adaptive. This gives criteria for when the adaptive method can be expected to outperform the non-adaptive for other pricing problems. In addition to evaluating the method for different problem parameters, we present simulation results after adding various techniques to enhance the adaptive method itself. This includes using variance reduction techniques for each sub-problem resulting from the partitioning of the integration domain. All simulations are done with both pseudo-random numbers and quasi-random numbers (low discrepancy sequences), resulting in Monte Carlo (MC) and quasi-Monte Carlo (QMC) estimators and the ability to compare them in the given setting. The results show that the adaptive method can give performance gains in the order of magnitudes for many configurations, but it should not be used incautious, since this ability depends heavily on the problem at hand.

Keywords: Multi-dimensional option pricing; adaptive numerical integration; variance reduction techniques; quasi-Monte Carlo methods; singular value decomposition (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024903001943

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