Efficient simulation methods for the Quasi-Gaussian term-structure model with volatility smiles: practical applications of the KLNV-scheme

Yuji Shinozaki

Quantitative Finance, 2021, vol. 21, issue 7, 1147-1161

Abstract: This paper considers computational challenges to practically important problems related to pricing exotic interest rate derivatives, using the Kusuoka–Lyons–Ninomiya–Victoir scheme (KLNV-scheme) which is a higher-order discretization framework for performing weak approximations of stochastic differential equations. The author demonstrates the KLNV-scheme is even more effective for some types of practical high-dimensional problems, especially when close or approximate solutions to the involved ordinary differential equations can be found. Moreover, the numerical results show the proposed methods are 500 to more than 6000 times faster compared to the conventional methods.

Date: 2021
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DOI: 10.1080/14697688.2020.1861320

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