Download This PaperPricing and Risk Management with Stochastic Volatility Using Importance Sampling
31 Pages Posted: 30 Oct 2012 Last revised: 20 Mar 2014
Date Written: March 20, 2014
Abstract
Abstract In this paper, we apply importance sampling to Heston's stochastic volatility model and Bates's stochastic volatility model with jumps. We propose an effective numerical scheme that dramatically improves the speed of importance sampling. We show how the Greeks can be computed using the Likelihood Ratio Method based on characteristic function, and how combining it with importance sampling leads to a significant variance reduction for the Greeks. All results are illustrated using European and barrier options.
Keywords: Importance sampling, Simulation, Stochastic volatility
Suggested Citation: Suggested Citation
Stilger, Przemyslaw Stan and Acomb, Simon and Poon, Ser-Huang, Pricing and Risk Management with Stochastic Volatility Using Importance Sampling (March 20, 2014). Available at SSRN: https://ssrn.com/abstract=2168415 or http://dx.doi.org/10.2139/ssrn.2168415
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