RT Journal Article
SR Electronic
T1 Comonotonic Monte Carlo Simulation and Its Applications in Option Pricing and Quantification of Risk
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 18
OP 28
DO 10.3905/jod.2016.24.1.018
VO 24
IS 1
A1 Chateauneuf, Alain
A1 Mostoufi, Mina
A1 Vyncke, David
YR 2016
UL http://jod.iijournals.com/content/24/1/18.abstract
AB For many kinds of derivative valuation problems, especially those that try for greater realism using return processes that are more consistent with empirical evidence, Monte Carlo simulation is the only feasible solution technique. Among the well-known strategies to improve its efficiency, the use of a well-chosen control variate is often very effective. But a good selection can make a lot of difference. This article explains how the mathematical concept of comonotonicity can be applied as a new way to create a control variate. A remarkable improvement in performance can be achieved using the comonotonic upper bound as the control variate. The article illustrates the power of Comonotonic Monte Carlo simulation in estimating tail value at risk and pricing arithmetic Asian options.