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
Date Written: September 2005
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: Suggested Citation
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