Giles, M. B. and Burgos, Sylvestre (2011) Computing Greeks using multilevel path simulation. Technical Report. .. (Unpublished)
We investigate the extension of the multilevel Monte Carlo method [2, 3] to the calculation of Greeks. The pathwise sensitivity analysis  differentiates the path evolution and effectively reduces the smoothness of the payoff. This leads to new challenges: the use of naive algorithms is often impossible because of the inapplicability of pathwise sensitivities to discontinuous payoffs.
These challenges can be addressed in three different ways: payoff smoothing using conditional expectations of the payoff before maturity ; an approximation of the above technique using path splitting for the final timestep ; the use of a hybrid combination of pathwise sensitivity and the Likelihood Ratio Method . We discuss the strengths and weaknesses of these alternatives in different multilevel Monte Carlo settings.
|Item Type:||Technical Report (Technical Report)|
|Subjects:||D - G > Game theory, mathematical finance, economics, social and behavioral sciences|
|Research Groups:||Mathematical and Computational Finance Group|
|Deposited By:||Eprints Administrator|
|Deposited On:||28 Jan 2011 13:37|
|Last Modified:||28 Jan 2011 13:37|
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