Exact Simulation Of The 3/2 Model

This paper discusses the exact simulation of the stock price process underlying the 3/2 model. Using a result derived by Craddock and Lennox using Lie Symmetry Analysis, the authors adapt the Broadie-Kaya algorithm for the simulation of affine processes to the 3/2 model. They also discuss variance reduction techniques and find that conditional Monte Carlo techniques combined with quasi-Monte Carlo point sets result in significant variance reductions. Exact simulation allows them to sample solutions of Stochastic Differential Equations (SDEs) from the appropriate distribution functions. Alternatively, one could discretize the time interval and simulate the solution by stepping through the time grid.

Provided by: University of Technology Sydney Topic: Big Data Date Added: May 2011 Format: PDF

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