Prediction-Enhanced Monte Carlo: A Machine Learning View on Control Variate

Fengpei Li, Haoxian Chen, Jiahe Lin, Arkin Gupta, Xiaowei Tan, Gang Xu, Yuriy Nevmyvaka, Agostino Capponi and Henry Lam

Papers from arXiv.org

Abstract: Despite being an essential tool across engineering and finance, Monte Carlo simulation can be computationally intensive, especially in large-scale, path-dependent problems that hinder straightforward parallelization. A natural alternative is to replace simulation with machine learning or surrogate prediction, though this introduces challenges in understanding the resulting errors.We introduce a Prediction-Enhanced Monte Carlo (PEMC) framework where we leverage machine learning prediction as control variates, thus maintaining unbiased evaluations instead of the direct use of ML predictors. Traditional control variate methods require knowledge of means and focus on per-sample variance reduction. In contrast, PEMC aims at overall cost-aware variance reduction, eliminating the need for mean knowledge. PEMC leverages pre-trained neural architectures to construct effective control variates and replaces computationally expensive sample-path generation with efficient neural network evaluations. This allows PEMC to address scenarios where no good control variates are known. We showcase the efficacy of PEMC through two production-grade exotic option-pricing problems: swaption pricing in HJM model and the variance swap pricing in a stochastic local volatility model.

Date: 2024-12
New Economics Papers: this item is included in nep-big, nep-cmp and nep-rmg
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