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A Multilevel Approach to Control Variates

Journal of Computational Finance, Forthcoming

21 Pages Posted: 18 Feb 2009 Last revised: 22 Jun 2016

Adam Speight

Georgia State University

Date Written: February 15, 2009

Abstract

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

Speight, Adam, A Multilevel Approach to Control Variates (February 15, 2009). Journal of Computational Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1345567

Adam Speight (Contact Author)

Georgia State University ( email )

P.O. Box 4036
Atlanta, GA 30302-4036
United States
4044137482 (Phone)
4044137499 (Fax)

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