Nested Multilevel Monte Carlo with Biased and Antithetic Sampling

TL;DR

This paper develops a biased multilevel Monte Carlo method for nested expectation problems, reducing computational complexity in financial risk estimation and option pricing, especially when exact sampling is infeasible.

Contribution

It introduces a biased multilevel Monte Carlo approach for nested expectations, relaxing strict sampling assumptions and extending to approximate and antithetic sampling of the inner variables.

Findings

Achieves order (\u03b5^{-2}) computational cost under certain conditions.

Extends to approximate and antithetic sampling of Y.

Cost is order (((||))) (|||)) with more general assumptions.

Abstract

We consider the problem of estimating a nested structure of two expectations taking the form $U_0 = E[\max\{U_1(Y), \pi(Y)\}]$, where $U_1(Y) = E[X\ |\ Y]$. Terms of this form arise in financial risk estimation and option pricing. When $U_1(Y)$ requires approximation, but exact samples of $X$ and $Y$ are available, an antithetic multilevel Monte Carlo (MLMC) approach has been well-studied in the literature. Under general conditions, the antithetic MLMC estimator obtains a root mean squared error $\varepsilon$ with order $\varepsilon^{-2}$ cost. If, additionally, $X$ and $Y$ require approximate sampling, careful balancing of the various aspects of approximation is required to avoid a significant computational burden. Under strong convergence criteria on approximations to $X$ and $Y$, randomised multilevel Monte Carlo techniques can be used to construct unbiased Monte Carlo estimates of $U_1$, which can be paired with an antithetic MLMC estimate of $U_0$ to recover order $\varepsilon^{-2}$ computational cost. In this work, we instead consider biased multilevel approximations of $U_1(Y)$, which require less strict assumptions on the approximate samples of $X$. Extensions to the method consider an approximate and antithetic sampling of $Y$. Analysis shows the resulting estimator has order $\varepsilon^{-2}$ asymptotic cost under the conditions required by randomised MLMC and order $\varepsilon^{-2}|\log\varepsilon|^3$ cost under more general assumptions.