A COMPARISON OF GRADIENT ESTIMATION TECHNIQUES FOR EUROPEAN CALL OPTIONS

Lingyan Cao and Zheng-Feng Guo

Accounting & Taxation, 2012, vol. 4, issue 1, 75-81

Abstract: Assuming the underlying assets follow a Variance-Gamma (VG) process, we consider the problem of estimating gradients of a European call option by Monte Carlo simulation methods. In this paper, we compare indirect methods (finite difference techniques such as forward differences) and two direct methods, infinitesimal perturbation analysis (IPA) and likelihood ratio (LR) method. We conduct simulation experiments to evaluate the efficiency of different estimators and discuss the advantage and disadvantage of each method.

Keywords: Greeks; IPA; LR; Variance-Gamma (search for similar items in EconPapers)
JEL-codes: G13 G15 G17 (search for similar items in EconPapers)
Date: 2012
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