Nematrian Reference Library
[this page | back links]
Set out below is information (held by the Nematrian website) on the reference you have selected
Pages on this website that contain links to this reference include CalibratingPriorsToMarketImpliedData1
|Avellandeda M., Friedman C., Buff R, Granchamp N., Kruk L. and Newman J. (2001)||Weighted Monte Carlo: A New Technique for Calibrating Asset-Pricing Models||here
"A general approach for calibrating Monte Carlo models to the market prices of benchmark securities is presented. Starting from a given model for market dynamics (price diffusion, rate diffusion, etc.), the algorithm corrects price-misspecifications and finite-sample effects in the simulation by assigning "probability weights" to the simulated paths. The choice of weights is done by minimizing the Kullback-Leibler relative entropy distance of the posterior measure to the empirical measure. The resulting ensemble prices the given set of benchmark instruments exactly or in the sense of least-squares. We discuss pricing and hedging in the context of these weighted Monte Carlo models. A significant reduction of variance is demonstrated theoretically as well as numerically. Concrete applications to the calibration of stochastic volatility models and term-structure models with up to 40 benchmark instruments are presented. The construction of implied volatility surfaces and forward-rate curves and the pricing and hedging of exotic options are investigated through several examples."
to choose a new Category/Sub-Category or here
for a list of all references held by the Nematrian website. Please contact us
if any of the above material is inaccurate or if there are references you think should be included that we have excluded or vice-versa.