Reducing the Variance of Likelihood Ratio Greeks with Monte Carlo

Luca Capriotti

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arXiv · 0808.2332

Reducing the Variance of Likelihood Ratio Greeks with Monte Carlo

Luca Capriotti

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Abstract

We investigate the use of Antithetic Variables, Control Variates and Importance Sampling to reduce the statistical errors of option sensitivities calculated with the Likelihood Ratio Method in Monte Carlo. We show how Antithetic Variables solve the well-known problem of the divergence of the variance of Delta for short maturities and small volatilities. With numerical examples within a Gaussian Copula framework, we show how simple Control Variates and Importance Sampling strategies provide computational savings up to several orders of magnitude.

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Luca Capriotti. 2008-08-18. Reducing the Variance of Likelihood Ratio Greeks with Monte Carlo. https://arxiv.org/abs/0808.2332

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