Is there a concise way of learning the core Monte Carlo Methods from resources available online?
This leads to my next question which is what are the core ideas to learn in Monte Carlo methods?
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2 Answers
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There is Monte Carlo Simulation and there is Monte Carlo Simulation. If you are referring to a simple question like simulating dice or calculation of $\pi$ or even vanilla option price calculation, it is one thing and "concisely" available. I recommend get a gist of small examples from CS books and then get on with finance.
But if you are referring something more advanced applications using particle filtering, variance reduction, gibbs sampling, Metropolis-Hastings, MCMC, sequential MC, quasi-MC etc. I recommend you to look for CS books first and then use them on finance.
Well luckily I got both courses at university here are some sources.
My Monte Carlo course's (I am not the instructor, just took the course) home page, you can still download from the links.
Hull's book Options, Futures and Other Derivatives is also a good reference.
Tools for Computational Finance is a bit advanced and finance-y.
There are also online courses for it. MIT OCW has one.
The core idea of MC is trial and error. As you venture on the MC way you see smarter ways of doing it.
My advice of the path to learn is
- Learn the basics of MC (dice, area of a shape, coin tosses etc.)
- Have some insight on basic statistical principles (Law of Large Numbers, Central Limit Theorem, Maximum Likelihood, Bias etc.)
- Do a simple vanilla option price simulation and compare it with BS
- Go for variance reduction techniques (control variates, important sampling etc.)
- Try advanced topics (MH, Gibbs, Particle Filtering)
Caution: Monte Carlo is both computationally and mathematically challenging. The 'basics' are really fun and basic but to significantly benefit from them you need to invest heavily on your learning.
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$\begingroup$ Very interesting links, especially to the class notes, although I doubt this is perfectly legal. $\endgroup$– SRKXCommented Sep 5, 2014 at 3:59
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$\begingroup$ From my side by providing the link there is no problem. The course's page is publicly accessible from the instructor's web page. From the instructor's side, to the best of my knowledge, I don't think there are any links that would compromise copyright. Students have access to university's extensive library, so I don't think that page contains anything illegal. $\endgroup$ Commented Sep 5, 2014 at 7:27
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Your question is too general because Monte Carlo methods differ quite a bit. It's driven more by the problem you are trying to solve, significant result sets, etc, etc.
You would either have to
- provide more details to what you're trying to solve or;
- try programming some Monte Carlo simulations yourself.
My first experience with them was trying to solve a progressive jackpot game for a friend.
Sometimes, you just have to throw yourself into code in order to learn.
