t-Copula generation for control variates

Wolfgang Hörmann and Halis Sak

Mathematics and Computers in Simulation (MATCOM), 2010, vol. 81, issue 4, 782-790

Abstract: The standard method for generating multi-t vectors is simple and convenient but it has the disadvantage that the generated multi-normal and multi-t vectors are not similar. For t-copula models this destroys much of the variance reduction when using the result of the multi-normal model as external control variate. Therefore we develop a new generation method for multi-t vectors. It is based on the polar method and numerical inversion, and generates multi-normal and multi-t vectors that are very similar. Numerical experiments with simple functions of the weighted sum of t-copula vectors and with pricing European basket options with a t-copula model confirm that the obtained variance reduction factors of the new method are high; 2–100 times higher than when using the standard generation method.

Keywords: Monte Carlo simulation; t-Copula; Control variate; Polar method (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:81:y:2010:i:4:p:782-790

DOI: 10.1016/j.matcom.2010.07.005

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