Some contributions to sequential Monte Carlo methods for option pricing

Deborshee Sen, Ajay Jasra, Yan Zhou

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


Pricing options is an important problem in financial engineering. In many scenarios of practical interest, financial option prices associated with an underlying asset reduces to computing an expectation w.r.t. a diffusion process. In general, these expectations cannot be calculated analytically, and one way to approximate these quantities is via the Monte Carlo (MC) method; MC methods have been used to price options since at least the 1970s. It has been seen in Del Moral P, Shevchenko PV. [Valuation of barrier options using sequential Monte Carlo. 2014. arXiv preprint] and Jasra A, Del Moral P. [Sequential Monte Carlo methods for option pricing. Stoch Anal Appl. 2011;29:292–316] that Sequential Monte Carlo (SMC) methods are a natural tool to apply in this context and can vastly improve over standard MC. In this article, in a similar spirit to Del Moral and Shevchenko (2014) and Jasra and Del Moral (2011), we show that one can achieve significant gains by using SMC methods by constructing a sequence of artificial target densities over time. In particular, we approximate the optimal importance sampling distribution in the SMC algorithm by using a sequence of weighting functions. This is demonstrated on two examples, barrier options and target accrual redemption notes (TARNs). We also provide a proof of unbiasedness of our SMC estimate.
Original languageEnglish (US)
JournalJournal of Statistical Computation and Simulation
Issue number4
StatePublished - Mar 4 2017
Externally publishedYes

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Generated from Scopus record by KAUST IRTS on 2019-11-20


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