Path Integrals and Smart Monte Carlo - II

40 Pages Posted: 13 Jul 2016 Last revised: 22 Jul 2016

Date Written: July 11, 2016

Abstract

“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

Dash, Jan and Yang, Xipei, Path Integrals and Smart Monte Carlo - II (July 11, 2016). Available at SSRN: https://ssrn.com/abstract=2808179 or http://dx.doi.org/10.2139/ssrn.2808179

Jan Dash (Contact Author)

Bloomberg LP ( email )

731 Lexington Ave
New York, NY 10022
United States

Xipei Yang

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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