Estimating Security Price Derivatives Using Simulation
Posted: 20 Dec 1998
Date Written: December 2, 1993
In this paper we present two direct methods, a pathwise method and a likelihood ratio method, for estimating derivatives of security prices using simulation. With the direct methods, the information from a single simulation can be used to estimate multiple derivatives along with a security's price. The main advantage of the direct methods over re-simulation is increased computational speed. Another advantage is that the direct methods give unbiased estimates of derivatives, whereas the estimates obtained by re-simulation are biased. Computational results are given for both direct methods and comparisons are made to the standard method of re-simulation to estimate derivatives. The methods are illustrated for a path independent model (European options), a path dependent model (Asian options), and a model with multiple state variables (options with stochastic volatility).
JEL Classification: G12, G13
Suggested Citation: Suggested Citation