Asymptotic Normality for EMS Option Price Estimator with Continuous or Discontinuous Payoff Functions

Zhushun Yuan () and Gemai Chen ()
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Zhushun Yuan: Department of Mathematics and Statistics, University of Calgary, Calgary, Alberta T2N 1N4, Canada
Gemai Chen: Department of Mathematics and Statistics, University of Calgary, Calgary, Alberta T2N 1N4, Canada

Management Science, 2009, vol. 55, issue 8, 1438-1450

Abstract: Empirical martingale simulation (EMS) was proposed by Duan and Simonato (Duan, J.-C., J.-G. Simonato. 1998. Empirical martingale simulation for asset prices. Management Sci. 44(9) 1218-1233) as an adjustment to the standard Monte Carlo simulation to reduce simulation errors. The EMS price estimator of derivative contracts was shown to be asymptotically normally distributed in Duan et al. (Duan, J.-C., G. Gauthier, J.-G. Simonato. 2001. Asymptotic distribution of the EMS option price estimator. Management Sci. 47(8) 1122-1132) when the payoffs are piecewise linear and continuous. In this paper, we extend the asymptotic normality result to more general continuous payoffs, and for discontinuous payoffs we make a conjecture.

Keywords: empirical martingale simulation; Monte Carlo; Black-Scholes; GARCH; options; regression analysis; asymptotic normality; coverage rate (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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