Variance Reduction and Efficiency of Monte Carlo Simulation in Financial Model

7 Pages Posted: 14 Dec 2017

See all articles by Naima Soukher

Naima Soukher

University Hassan II of Casablanca - Department of Mathematics

B. Daafi

University Cadi Ayyad - Department of Mathematics

J. Bouyaghroumni

University Hassan II of Casablanca - Department of Mathematics

A. Namir

University Hassan II of Casablanca - Department of Mathematics

F. Lahmidi

University Hassan II of Casablanca

Date Written: December 18, 2017

Abstract

In recent years, finance specialists have described several phenomena and they are developing calculation methods thanks to mathematical tools that are becoming more and more sophisticated. Thus, our research aims to use in a practical way the main operating techniques of the Monte Carlo simulation applied to finance. This article presents the Monte Carlo method as part of the simulation of the stochastic model in finance. Note that the use of this method often represents an extra cost in calculation that should be taken into account in the study of performance. Indeed, the method is not effective when the variance is too high. A technique of variance reduction is the solution to reduce the variability of the estimators and consequently reduce the simulation time. A reduction of the variance can only be accomplished by means of knowledge of information, which can be quantitative or qualitative on the studied phenomenon. The more information we have, the lower the variability of the estimator is likely to be.

Keywords: Monte Carlo, Simulation, Stochastics, Variance, Finance

Suggested Citation

Soukher, Naima and Daafi, B. and Bouyaghroumni, J. and Namir, A. and Lahmidi, F., Variance Reduction and Efficiency of Monte Carlo Simulation in Financial Model (December 18, 2017). Available at SSRN: https://ssrn.com/abstract=3086084 or http://dx.doi.org/10.2139/ssrn.3086084

Naima Soukher (Contact Author)

University Hassan II of Casablanca - Department of Mathematics ( email )

Casablanca
Morocco

B. Daafi

University Cadi Ayyad - Department of Mathematics

Marrakech
Morocco

J. Bouyaghroumni

University Hassan II of Casablanca - Department of Mathematics

Casablanca
Morocco

A. Namir

University Hassan II of Casablanca - Department of Mathematics

Casablanca
Morocco

F. Lahmidi

University Hassan II of Casablanca

Casablanca, 20000
Morocco

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