Turbocharging Monte Carlo pricing for the rough Bergomi model

Ryan McCrickerd and Mikko S. Pakkanen

Quantitative Finance, 2018, vol. 18, issue 11, 1877-1886

Abstract: The rough Bergomi model, introduced by Bayer et al. [Quant. Finance, 2016, 16(6), 887–904], is one of the recent rough volatility models that are consistent with the stylised fact of implied volatility surfaces being essentially time-invariant, and are able to capture the term structure of skew observed in equity markets. In the absence of analytical European option pricing methods for the model, we focus on reducing the runtime-adjusted variance of Monte Carlo implied volatilities, thereby contributing to the model’s calibration by simulation. We employ a novel composition of variance reduction methods, immediately applicable to any conditionally log-normal stochastic volatility model. Assuming one targets implied volatility estimates with a given degree of confidence, thus calibration RMSE, the results we demonstrate equate to significant runtime reductions—roughly 20 times on average, across different correlation regimes.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:18:y:2018:i:11:p:1877-1886

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DOI: 10.1080/14697688.2018.1459812

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