PDF iconDownload This Paper
Open PDF in Browser
Add Paper to My Library
Permalink
Using these links will ensure access to this page indefinitely
Copy URL
Copy DOI

A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton Models with Jumps

Quantitative Finance Research Centre Research Paper Number No. 167

33 Pages Posted: 2 May 2006

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School; Financial Research Network (FIRN)

Erik Schlögl

University of Technology Sydney (UTS), Quantitative Finance Research Centre; University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management; Faculty of Science, Department of Statistics, University of Johannesburg; Financial Research Network (FIRN)

Date Written: September 2005

Abstract

This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process and within the Markovian HJM framework developed in Chiarella & Nikitopoulos (2003). Closed form solutions for the price of a bond option under deterministic volatility specifications are derived and a control variate numerical method is developed under a more general state dependent volatility structure, a case in which closed form solutions are generally not possible. In doing so, we provide a novel perspective on the control variate methods by going outside a given complex model to a simpler more tractable setting to provide the control variates.

Keywords: HJM model, jump process, bond option prices, control variate, Monte Carlo simulations

JEL Classification: E43, G33, G13

Suggested Citation

Chiarella, Carl and Sklibosios Nikitopoulos, Christina and Schloegl, Erik, A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton Models with Jumps (September 2005). Quantitative Finance Research Centre Research Paper Number No. 167, Available at SSRN: https://ssrn.com/abstract=893085 or http://dx.doi.org/10.2139/ssrn.893085

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Erik Schloegl

University of Technology Sydney (UTS), Quantitative Finance Research Centre ( email )

Ultimo
PO Box 123
Sydney, NSW 2007
Australia
+61 2 9514 2535 (Phone)

HOME PAGE: http://www.schlogl.com

University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management ( email )

Leslie Commerce Building
Rondebosch
Cape Town, Western Cape 7700
South Africa

Faculty of Science, Department of Statistics, University of Johannesburg ( email )

Auckland Park, 2006
South Africa

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

PDF iconDownload This Paper
Open PDF in Browser

Do you want regular updates from SSRN on Twitter?

Follow SSRN

Paper statistics

Downloads
187
Abstract Views
1,463
rank
219,593
26 References
PlumX Metrics

Related eJournals

Recommended Papers