Estimating Security Price Derivatives Using Simulation

Posted: 20 Dec 1998

See all articles by Mark Broadie

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations

Paul Glasserman

Columbia Business School

Date Written: December 2, 1993

Abstract

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

Broadie, Mark and Glasserman, Paul, Estimating Security Price Derivatives Using Simulation (December 2, 1993 ). Available at SSRN: https://ssrn.com/abstract=5456

Mark Broadie (Contact Author)

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-4103 (Phone)

Paul Glasserman

Columbia Business School ( email )

3022 Broadway
403 Uris Hall
New York, NY 10027
United States
212-854-4102 (Phone)
212-316-9180 (Fax)

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