NDLI: A Novel Monte Carlo Approach to Hybrid Local Volatility Models

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A Novel Monte Carlo Approach to Hybrid Local Volatility Models

Content Provider	Scilit
Author	Stoep, Anthonie Willem Van Der Grzelak, Lech A. Oosterlee, Cornelis W.
Copyright Year	2016
Description	Journal: SSRN Electronic Journal We present in a Monte Carlo simulation framework a novel approach for the evaluation of hybrid local volatility (Dupire 1994, Derman and Kani 1998) models. In particular, we consider the stochastic local volatility model - see e.g. Lipton et al. (2014), Piterbarg (2007), Tataru and Fisher (2010), Lipton (2002) - and the local volatility model incorporating stochastic interest rates - see e.g. Atlan (2006), Piterbarg (2006), Deelstra and Rayée (2012), Ren et al. (2007). For both model classes a particular (conditional) expectation needs to be evaluated, which cannot be extracted from the market and is expensive to compute. We establish accurate and 'cheap to evaluate' approximations for the expectations by means of the stochastic collocation method (Babuska et al. 2007, Xiu and Hesthaven 2005, Beck et al. 2012, Nobile et al. 2008, Sankaran and Marsden 2011) which was recently applied in the financial context (Grzelak et al. 2014, Grzelak and Oosterlee 2017), combined with standard regression techniques. Monte Carlo pricing experiments confirm that our method is highly accurate and fast.
Related Links	https://ir.cwi.nl/pub/25672/QuantFin_SRArticle.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2766990
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.2766990
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2016-09-29
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Religion and Religious Studies Local Volatility Monte Carlo
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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