An exact method for the sensitivity analysis of systems simulated by rejection techniques

Mark Joshi and Dan Zhu

European Journal of Operational Research, 2016, vol. 254, issue 3, 875-888

Abstract: We compute first- and second-order sensitivities of functions simulated by rejection techniques. The methodology is to perform a measure change on every acceptance test, so that the pathwise discontinuities resulting from the rejection decisions are removed. The change of measure is chosen to be optimal in terms of minimizing variances of the likelihood ratio terms. Applications are presented for computing Greeks of equity options with certain Le´vy-driven underlyings and to finding sensitivities of performance measures in queueing systems. The numerical results demonstrate the efficacy and speed of the method.

Keywords: Monte Carlo simulation; Sensitivity analysis; Acceptance–rejection sampling; Option pricing under Levy processes; Queuing theory (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:254:y:2016:i:3:p:875-888

DOI: 10.1016/j.ejor.2016.04.024

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