Operations Research
A unified view of the IPA, SF, and LR gradient estimation techniques
Management Science
Estimating security price derivatives using simulation
Management Science
Control variate technique: a constructive approach
Proceedings of the 40th Conference on Winter Simulation
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We adapt a newly proposed generic approach to control variate selection to the problem of efficient estimation of sensitivity of financial security prices to model parameters, the so-called Greeks. We show that estimators based on pathwise and likelihood ratio methods can be cast in a general setting where generic control variates can be systematically defined for their estimation. In general, the means of such controls cannot be exactly calculated. One can use the Biased or Estimated Control Variates approach and estimate the means via simulation, or use the approach of DataBase Monte Carlo (DBMC) which also requires estimation of control means via simulation. We consider a parametric setting where price sensitivities need to be estimated repeatedly at multiple parameters. The fact that the same controls can be used for multiple estimation problems can justify the setup cost. The approach is illustrated via simple examples and preliminary computational results are provided.