Title :
A Wiener measure theoretic approach to pricing extreme-value-related derivatives
Author :
Chen, Nan ; Huang, Zhengyu
Author_Institution :
Dept. of Syst. Eng. & Eng. Manage., Chinese Univ. of Hong Kong, Shatin, China
Abstract :
Discretization schemes converge slowly when simulating extreme values for stochastic differential equations. Using a Wiener measure decomposition approach, this paper constructs an unbiased estimator for pricing extreme-value-related derivatives, such as barrier and lookback options, under a diffusion market model. A strong condition on the coefficients is needed in the derivation of the estimator. We also propose a truncation technique to remove this requirement and show that the truncation error decays exponentially. The numerical experiments reveal that this estimator is accurate and efficient.
Keywords :
differential equations; pricing; stochastic processes; Wiener measure theoretic approach; diffusion market model; discretization schemes; pricing extreme value related derivatives; stochastic differential equations; truncation error; truncation technique; unbiased estimator; Buildings; Computational modeling; Finite wordlength effects; Measurement standards; Monte Carlo methods; Motion measurement; Pricing; Research and development management; Stochastic systems; Systems engineering and theory;
Conference_Titel :
Simulation Conference (WSC), Proceedings of the 2009 Winter
Conference_Location :
Austin, TX
Print_ISBN :
978-1-4244-5770-0
DOI :
10.1109/WSC.2009.5429559