Multi-Level Monte Carlo Simulations with Importance Sampling

30 Pages Posted: 3 Jun 2013 Last revised: 21 Mar 2014

See all articles by Przemyslaw Stan Stilger

Przemyslaw Stan Stilger

University of Manchester - Manchester Business School

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Date Written: March 21, 2014

Abstract

Abstract We present an application of importance sampling to multi-asset options under the Heston and the Bates models as well as to the Heston-Hull-White and the Heston-Cox-Ingersoll-Ross models. Moreover, we provide an efficient importance sampling scheme in a Multi-Level Monte Carlo simulation. In all cases, we explain how the Greeks can be computed in the different simulation schemes using the Likelihood Ratio Method, and how combining it with importance sampling leads to a significant variance reduction for the Greeks.

Keywords: Importance sampling, Simulation, Stochastic volatility

Suggested Citation

Stilger, Przemyslaw Stan and Poon, Ser-Huang, Multi-Level Monte Carlo Simulations with Importance Sampling (March 21, 2014). Available at SSRN: https://ssrn.com/abstract=2273215 or http://dx.doi.org/10.2139/ssrn.2273215

Przemyslaw Stan Stilger (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
96 Euston Road
London, NW12DB
United Kingdom

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