Path Integrals and Smart Monte Carlo - II
40 Pages Posted: 13 Jul 2016 Last revised: 22 Jul 2016
Date Written: July 11, 2016
“Smart Monte Carlo” (SMC) improves accuracy and speed. We extend results in an earlier paper, applying SMC to path-dependent deals and multifactor models. Auxiliary results are a path-to-path distance, an analytic approximation for N-dimensional Gaussian integrals, and time interpolation results. We suggest “model perturbation” using simple approximate models, and introduce a new product “DIAS” for better mortgage servicing hedging. We prove a consistency condition for the MRG interest-rate model, and discuss real-world vs. risk-neutral simulations.
Keywords: Smart Monte Carlo, SMC, accuracy, speed, extend, N-dimensional Gaussian integrals, path-to-path distance, time interpolation , consistency condition, MRG interest-rate model, real-world, risk-neutral, risk-neutral,mortgage servicing, hedge
JEL Classification: C14, C63, C65, G1
Suggested Citation: Suggested Citation