TL;DR
This paper adapts the Broadie-Kaya algorithm for exact simulation of the 3/2 model's stock price process, incorporating variance reduction techniques like conditional Monte Carlo and quasi-Monte Carlo to improve efficiency.
Contribution
It extends the Broadie-Kaya algorithm to the 3/2 model using Lie symmetry analysis, providing a novel exact simulation method with enhanced variance reduction.
Findings
Conditional Monte Carlo reduces variance significantly.
Quasi-Monte Carlo improves simulation accuracy.
The adapted algorithm effectively simulates the 3/2 model.
Abstract
This paper discusses the exact simulation of the stock price process underlying the 3/2 model. Using a result derived by Craddock and Lennox using Lie Symmetry Analysis, we adapt the Broadie-Kaya algorithm for the simulation of affine processes to the 3/2 model. We also discuss variance reduction techniques and find that conditional Monte Carlo techniques combined with quasi-Monte Carlo point sets result in significant variance reductions.
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Taxonomy
TopicsMathematical Approximation and Integration · Markov Chains and Monte Carlo Methods · Bayesian Methods and Mixture Models