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Adaptive Monte Carlo Variance Reduction for Lévy Processes with Two-Time-Scale Stochastic Approximation

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Abstract

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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Authors and Affiliations

  1. Center for the Study of Finance and Insurance, Osaka University, Toyonaka, 560-8531, Japan

    Reiichiro Kawai

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  1. Reiichiro Kawai
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Correspondence to Reiichiro Kawai.

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Kawai, R. Adaptive Monte Carlo Variance Reduction for Lévy Processes with Two-Time-Scale Stochastic Approximation. Methodol Comput Appl Probab 10, 199–223 (2008). https://doi.org/10.1007/s11009-007-9043-5

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  • DOI: https://doi.org/10.1007/s11009-007-9043-5

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