Accelerating Pathwise Greeks in the LIBOR Market Model
28 Pages Posted: 25 Feb 2011 Last revised: 1 Aug 2011
Date Written: February 24, 2011
In the framework of the displaced-diffusion LIBOR market model, we derive the pathwise adjoint method for the iterative predictor-corrector and Glasserman-Zhao drift approximations in the spot measure. This allows us to compute fast deltas and vegas under these schemes. We compare the discretisation bias obtained when computing Greeks with these methods to those obtained under the log-Euler and predictor-corrector approximations by performing tests with interest rate caplets and cancellable receiver swaps. The two predictor-corrector type methods were the most accurate by far. In particular, we found the iterative predictor-corrector method to be more accurate and slightly faster than the predictor-corrector method, the Glasserman-Zhao method to be relatively fast but highly inconsistent, and the log-Euler method to be reasonably accurate but only at low volatilities. Standard errors were not significantly different across all four discretisations.
Keywords: LIBOR market model, pathwise Greeks, adjoint methods
JEL Classification: G13
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