An efficient algorithm for simulating the drawdown stopping time and the running maximum of a Brownian motion

Angelos Dassios and Jia Wei Lim

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We define the drawdown stopping time of a Brownian motion as the first time its drawdown reaches a duration of length 1. In this paper, we propose an efficient algorithm to efficiently simulate the drawdown stopping time and the associated maximum at this time. The method is straightforward and fast to implement, and avoids simulating sample paths thus eliminating discretisation bias. We show how the simulation algorithm is useful for pricing more complicated derivatives such as multiple drawdown options.

Keywords: Drawdown stopping time; Monte Carlo simulation; multiple drawdown options (search for similar items in EconPapers)
JEL-codes: C1 (search for similar items in EconPapers)
Date: 2017-01-25
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in Methodology and Computing in Applied Probability, 25, January, 2017, 20(1), pp. 189-204. ISSN: 1387-5841

Downloads: (external link)
http://eprints.lse.ac.uk/68823/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:68823

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().