Using the continuous price as control variate for discretely monitored options

Kemal Dinçer Dingeç and Wolfgang Hörmann

Mathematics and Computers in Simulation (MATCOM), 2011, vol. 82, issue 4, 691-704

Abstract: Variance reduction is of highest importance in financial simulation. In this study, we present a new and simple variance reduction technique for pricing discretely monitored lookback and barrier options. It is based on using the corresponding continuously monitored option as external control variate. To obtain the value of the continuously monitored price both, conditional simulation and conditional expectation can be utilized. From numerical experiments we can conclude that the efficiency gains obtained by our new method are significant.

Keywords: Option pricing; Path dependent options; Variance reduction; Control variate (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:82:y:2011:i:4:p:691-704

DOI: 10.1016/j.matcom.2011.09.007

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