A general control variate method for option pricing under Lévy processes

Kemal Dinçer Dingeç and Wolfgang Hörmann

European Journal of Operational Research, 2012, vol. 221, issue 2, 368-377

Abstract: We present a general control variate method for simulating path dependent options under Lévy processes. It is based on fast numerical inversion of the cumulative distribution functions and exploits the strong correlation of the payoff of the original option and the payoff of a similar option under geometric Brownian motion. The method is applicable for all types of Lévy processes for which the probability density function of the increments is available in closed form. Numerical experiments confirm that our method achieves considerable variance reduction for different options and Lévy processes. We present the applications of our general approach for Asian, lookback and barrier options under variance gamma, normal inverse Gaussian, generalized hyperbolic and Meixner processes.

Keywords: Finance; Option pricing; Lévy processes; Monte Carlo simulation; Control variate; Numerical inversion (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:221:y:2012:i:2:p:368-377

DOI: 10.1016/j.ejor.2012.03.046

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