Recent advances in simulation for security pricing

Authors:
Phelim Boyle;Mark Broadie;Paul Glasserman
Affiliations:
School of Accountancy, University of Waterloo, Waterloo, Ontario, N2L 3G1;Columbia Business School, 415 Uris Hall, New York, NY;Columbia Business School, 403 Uris Hall, New York, NY
Venue:
WSC '95 Proceedings of the 27th conference on Winter simulation
Year:
1995

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Abstract

Computational methods play an important role in modern finance. Through the theory of arbitrage-free pricing, the price of a derivative security can be expressed as the expected value of its payouts under a particular probability measure. The resulting integral becomes quite complicated if there are several state variables or if payouts are path-dependent. Simulation has proved to be a valuable tool for these calculations. This paper summarizes some of the recent applications and developments of the Monte Carlo method to security pricing problems.