Adaptive Monte Carlo Variance Reduction for Lévy Processes with Two-Time-Scale Stochastic Approximation
- Reiichiro Kawai
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We propose an approach to a twofold optimal parameter search for a combined variance reduction technique of the control variates and the important sampling in a suitable pure-jump Lévy process framework. The parameter search procedure is based on the two-time-scale stochastic approximation algorithm with equilibrated control variates component and with quasi-static importance sampling one. We prove the almost sure convergence of the algorithm to a unique optimum. The parameter search algorithm is further embedded in adaptive Monte Carlo simulations in the case of the gamma distribution and process. Numerical examples of the CDO tranche pricing with the Gamma copula model and the intensity Gamma model are provided to illustrate the effectiveness of our method.
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- Adaptive Monte Carlo Variance Reduction for Lévy Processes with Two-Time-Scale Stochastic Approximation
Methodology and Computing in Applied Probability
Volume 10, Issue 2 , pp 199-223
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
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- Esscher transform
- Gamma distribution and process
- Girsanov theorem
- Monte Carlo simulation
- Infinitely divisible distribution
- Stochastic approximation
- Variance reduction
- Reiichiro Kawai (1)
- Author Affiliations
- 1. Center for the Study of Finance and Insurance, Osaka University, Toyonaka, 560-8531, Japan