Journal of Computational Finance, Forthcoming
21 Pages Posted: 18 Feb 2009 Last revised: 22 Jun 2016
Date Written: February 15, 2009
We present a new variance reduction technique that naturally applies to price financial derivatives by Monte Carlo simulation. Inspired by multigrid methods for solving PDEs, the technique is based on control variates derived from a sequence of approximations that converge pathwise to a limiting model. It applies to a large class of problems, and is easy to implement. Theory and computational results show this method can substantially reduce computational time relative to crude Monte Carlo estimation and is competitive with other variance reduction techniques under Monte Carlo sampling.
Keywords: Monte Carlo, Control Variates, Variance Reduction, Multilevel, Multigrid, Exotic Option, Derivative Pricing
JEL Classification: C15
Suggested Citation: Suggested Citation
Speight, Adam, A Multilevel Approach to Control Variates (February 15, 2009). Journal of Computational Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1345567