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Monte Carlo Simulation with an Asymptotic Expansion in HJM Framework

Akihiko Takahashi and Shuichiro Matsushima
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Akihiko Takahashi: Faculty of Economics, The University of Tokyo
Shuichiro Matsushima: The University of Tokyo

No CARF-J-005, CARF J-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We developed a variance reduction method of Monte Carlo simulations as well as an approximation formula based on an asymptotic expansion approach for pricing bond options and swaptions in HJM framework. As a numerical example we applied the technique to a realistic two-factor model and confirmed its validity.

Pages: 31 pages
Date: 2004-05
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