Importance sampling and statistical Romberg method for Lévy processes

Mohamed Ben Alaya, Kaouther Hajji and Ahmed Kebaier

Stochastic Processes and their Applications, 2016, vol. 126, issue 7, 1901-1931

Abstract: An important family of stochastic processes arising in many areas of applied probability is the class of Lévy processes. Generally, such processes are not simulatable especially for those with infinite activity. In practice, it is common to approximate them by truncating the jumps at some cut-off size ε (ε↘0). This procedure leads us to consider a simulatable compound Poisson process. This paper first introduces, for this setting, the statistical Romberg method to improve the complexity of the classical Monte Carlo method. Roughly speaking, we use many sample paths with a coarse cut-off εβ, β∈(0,1), and few additional sample paths with a fine cut-off ε. Central limit theorems of Lindeberg–Feller type for both Monte Carlo and statistical Romberg method for the inferred errors depending on the parameter ε are proved with explicit formulas for the limit variances. This leads to an accurate description of the optimal choice of parameters. Afterwards, the authors propose a stochastic approximation method in order to find the optimal measure change by Esscher transform for Lévy processes with Monte Carlo and statistical Romberg importance sampling variance reduction. Furthermore, we develop new adaptive Monte Carlo and statistical Romberg algorithms and prove the associated central limit theorems. Finally, numerical simulations are processed to illustrate the efficiency of the adaptive statistical Romberg method that reduces at the same time the variance and the computational effort associated to the effective computation of option prices when the underlying asset process follows an exponential pure jump CGMY model.

Keywords: Lévy processes; Esscher transform; Monte Carlo; Statistical Romberg; Variance reduction; Central limit theorems; CGMY model (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.spa.2015.12.008

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