On gamma estimation via matrix kriging

Xin Yun, L. Jeff Hong, Guangxin Jiang and Shouyang Wang

Naval Research Logistics (NRL), 2019, vol. 66, issue 5, 393-410

Abstract: In financial engineering, sensitivities of derivative prices (also known as the Greeks) are important quantities in risk management, and stochastic gradient estimation methods are used to estimate them given the market parameters. In practice, the surface (function) of the Greeks with respect to the underlying parameters is much more desired, because it can be used in real‐time risk management. In this paper, we consider derivatives with multiple underlying assets, and propose three stochastic kriging‐based methods, the element‐by‐element, the importance mapping, and the Cholesky decomposition, to fit the surface of the gamma matrix that can fulfill the time constraint and the precision requirement in real‐time risk management. Numerical experiments are provided to illustrate the effectiveness of the proposed methods.

Date: 2019
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https://doi.org/10.1002/nav.21850

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Persistent link: https://EconPapers.repec.org/RePEc:wly:navres:v:66:y:2019:i:5:p:393-410

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