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- Title
Numerical valuation of high dimensional multivariate European securities.
- Authors
Barraquand, Jerome
- Abstract
We consider the problem of pricing a contingent claim whose payoff depends on several sources of uncertainty. Using classical assumptions from the Arbitrage Pricing Theory, the theoretical price can be computed as the discounted expected value of future cash flows under the modified risk-neutral information process. Although analytical solutions have been developed elsewhere for a few particular option pricing problems, computing the arbitrage prices of securities under several sources of uncertainty is still an open problem in many instances. In this paper, we present efficient numerical techniques based upon Monte Carlo simulation for pricing European contingent claims depending on an arbitrary number of risk sources. We introduce in particular the method of quadratic resampling (QR), a new powerful error reduction technique for Monte Carlo simulation. Quadratic resampling can be efficiently combined with classical variance reduction methods such as importance sampling. Our numerical experiments show that the method is practical for pricing claims depending on up to one hundred underlying assets.
- Subjects
PRICING; ARBITRAGE; SECURITIES; INFORMATION resources; UNCERTAINTY; RISK assessment; RESAMPLING (Statistics); MONTE Carlo method; SIMULATION methods &; models; MATHEMATICAL statistics; STATISTICS; NUMERICAL analysis
- Publication
Management Science, 1995, Vol 41, Issue 12, p1882
- ISSN
0025-1909
- Publication type
Article
- DOI
10.1287/mnsc.41.12.1882