Importance Sampling in Lattice PricingModels
نویسنده
چکیده
Binomial lattice models nd widespread uses in the valuation of derivative nancial instruments. When these instruments are path-dependent (non-Markovian), it is usually necessary to resort to Monte Carlo simulation. However, a crude Monte Carlo sampling of the lattice can be very ineecient since a large number of sample paths may need to be calculated. We develop procedures for sampling the paths of a binomial lattice based on importance sampling and related methods. Such procedures can lead to a signiicant reduction in sample variance, but due to the very large number of sample paths, it is problematic to specify the \importance" of each path. A two-stage sampling procedure for doing this is presented, and also a method based on varying the lattice branching probabilities. The methods can be tted to instrument characteristics, either based on prior knowledge of the instruments' payoo functions, or adaptively.
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