Questions tagged [monte-carlo]
Monte Carlo simulation methods are a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results.
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Simulating Co-Integrated Assets
I know how to simulate correlated returns, but I do not know how to simulate Co-Integrated assets. I would like to simulate a co-integrated time series where the Beta Co-Efficient is not constant, but ...
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1answer
211 views
Projecting cash flows via Monte Carlo Simulation
I am looking to model the cash flows associated with a company as part of a Project finance experiment, where I got the idea from here. I'm looking to project cash flows for an Automotive company in ...
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1answer
152 views
Interpretation of vega out of BS formula
I am comparing Monte Carlo estimates of VaR (using importance sampling) under both the normal and student distributions. I am also considering risk factors other than log-prices; in particular, ...
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1answer
2k views
Compute cross-gamma
I am trying to use delta-gamma method with montecarlo simulations to calculate the VAR of a portfolio consisting in options and equities.
To use the method I need to compute a gamma matrix, that has ...
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1answer
1k views
How do I simulate stock prices for a 10 asset portfolio, over a period of 10 years in MATLAB? [closed]
If I have given vectors for return and volatility (i.e. I have two 1x10 vectors), and I assume at first that their correlation is 0 (meaning my covariance-variance matrix is just diagonal), how do I ...
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61 views
How to do Monte Carlo simulation given the stochastic ODE of a Brownian motion
I've learn the theoretical basis and lots of Brownian motion in quantitate finance. But i'm wondering how to actually simulate something based on brownian motion and make into something code-able or ...
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28 views
Simulated VaR with differently distributed processes
I am attempting to calculate the one-month 95th and 99th percentile profits for a two-year portfolio of energy-generating assets over the next three months. This means that the calculation has two ...
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14 views
What does it mean to change the initial average value to asset an asian-american option?
I am currently trying to replicate the Longstaff (2001) paper where he explained the least-squared approach to value American options. In section 4, he explained how to apply this method to asset a ...
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24 views
Calibrating Short-Rate Models to Eurodollar Futures Prices via Monte Carlo
I have a short rate model specified in the risk-neutral measure $Q$ defined by the continuously compounded money market $\beta(t)=e^{\int_0^tr(u)du}$. I'd like to calibrate this model to a set of ...
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14 views
Minimum variance hedge ratio price difference vs. log-returns
So from my understanding Hull (2012) f.e. shows that the optimal hedge ratio minimizes the variance of the returns. But what happens to the variance of the prices? Is the Minimum variance hedge ...
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19 views
Lognormal correlation bounds for Monte Carlo
As the lognormal distribution imposes bounds of attainable correlations as discussed in https://stats.stackexchange.com/questions/41734/attainable-correlations-for-lognormal-random-variables my ...
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11 views
Monte carlo error and minimum variance hedge ratio
So I was running a monte carlo simulation for two assets and a portfolio consisting of 1 quantity of the first asset and short a fraction x of the second asset to hedge, where the fraction is ...
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24 views
Degree of freedom input for Monte Carlo simulation of asset returns with multivariate t distribution
How do I calculate or estimate the degrees of freedom in order to perform a Monte Carlo simulation of asset returns with multivariate t distribution using R functions? I am able to calculate the mean ...
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34 views
Advantage of copula over estimation based on historical data
It seems to me hard to intuitively understand the concept of copulas and their advantages. For example, why would it be better to estimate value at risk of portfolio by modelling its asset returns ...
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25 views
Term structure of interest rate model calibration
I need to model term structure of interest rate and predict the zero curve. The database I am using to calibrate the model contains zero rate observations for approximately 10 years and for 37 ...
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0answers
15 views
Introducing initial lockout period for American-Asian options pricing in R
Currently attempting to price American-Bermuda-Asian call options using Monte Carlo simulations as done in Longstaff and Schwartz (2001).
The options have an initial lockout period of 3 months, ...
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12 views
Finding fifth and sixth polynomials for Headrick (2002) method for non-normal multivariate distribution
I am trying to perform a 3-asset class return Monte Carlo simulation. As the asset class returns are non-normal, I found the following function rHeadrick from the ...
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29 views
Value at Risk with Monte Carlo using DCC-Garch in R
So I was trying to compute the 1- day Value at Risk of a hedge portfolio (consisting of 1 stock and one future) with a DCC-Garch model in R. So what I did is since I had historical data of 10 years:
...
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1answer
52 views
How do you handle implied volatility performing a VaR Monte-Carlo simulation using a stochastic volatility process calibrated on the underlying
Say you have a portfolio consisting of options each having a market implied volatility. If you now use some stochastic volatility model like GARCH to calibrate the real world volatility of the ...
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25 views
Correlation in GARCH model
I don't think I have ever come across the concept of stochastic correlation so I imagine it's not very widespread, but I had the idea to implement a Monte Carlo VaR model for a portfolio of stocks by ...
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1answer
52 views
Generate Monte Carlo simulation of multivariate lognormal or weibull distributions in R
I intend to perform a Monte Carlo simulation of asset returns in R. I am currently using the rmvnorm function in the mvtnorm R ...
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18 views
Theta function in the Black Karasinski model to replicate the current yield curve?
I am trying to replicate a research paper "Gas Storage valuation using a Monte Carlo method"
Gas storage valuation using a monte carlo method
which is to me a not very complex but technical ...
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38 views
Discretizing Bates SVJ Model to simulate paths
I am trying to simulate a path for Bates Stochastic-Volatility-Jump model. It has the following dynamics:
I've managed to implement the Heston model by following Gatheral's books the Volatility ...
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1answer
69 views
MonteCarlo option pricing error estimate
Consider the problem of pricing an option via MonteCarlo with 10000 simulations. If the variance of the simulation is 100, which is the MC estimate of the error on the price?
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37 views
Do daily returns from a distribution with skew and/or kurtosis lead to options implied volatility skew?
I've been trying to price a call option using a Monte Carlo approach with the specific goal of showing implied volatility skew. I'm using the sinh-arcsinh transformation to make the random numbers I ...
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64 views
What is the relevant application of mathematics?
I want to model an asset (like a currency) that is sensitive to relative economic performance between two countries, which can be measured by GDP (for example). This is a very simple case with many ...
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21 views
EMTN with two barrier options and pricing by Monte Carlo method
I analyzing an EMTN (Euro Medium Term Note) for my Master's degree thesis, which uses 2 barrier options:
a Down and In put,
an Up and In put
However, I only know how to do it for Knock-out options. ...
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35 views
Monte Carlo Simulation with varying expected returns and volatilities
I have yearly CMAs which denote the 5-year forward looking returns and vols. These CMAs are updated every year. For example in 2004, the outlook for next 5 years is 11%, in 2005 the outlook is 10.8%. ...
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76 views
Approximation of portfolio VaR (after mapping) when Delta and Gamma both equal zero
As titled, I am having trouble estimating the VaR of a portfolio mapped as a function of a single risk factor $S$, in the form :
$$V(S) = S^3 - 30S^2 + 300S + 150$$
with current value $S = 10$.
$S$...
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20 views
Longstaff Schwartz with future conditional coupons
I've implemented the L-S algorithm for a simple put option. I want to value a more complex derivative which has future conditional coupons which only occur if the option is in the money. How would I ...
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1answer
82 views
Multi-legged Swap pricing
can anyone guide me how to price a multi-legged swap and whether I need Monte Carlo / LMM based approach or if there is a closed form solution.
Receive leg
"Libor 3m +1%"
Payment leg
If Libor is ...
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51 views
Using variance reduction on only some models
I am pricing options with some copula based models using Monte Carlo simulation. I was looking up some easily implementable variance reduction methods and decided on antithetic variates. However, ...
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1answer
85 views
Monte Carlo simulated price and Black Scholes Price are giving a huge difference in my Matlab code
I have written a script for showing Monte Carlo Price for a increasing N.
But comparing with BS results , This indicates a huge difference. Where is the error?
Function :
function [cpay,ppay] = ...
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1answer
107 views
How to price a barrier using monte carlo when return distribution is not iid?
this question is actually related to set the stop loss and stop return.
Say after a liquidity shock, I want to place two stops, one being stop loss and another being stop return. If I use, say 10 ...
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55 views
Antithetic sampling on non-linear payoff?
If I wish to price an option with Monte Carlo using the standard GBM process, which have payoff
$(max(S-K,0))^2$
Why is it not suitable for a non-linear payoff?
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250 views
Monte Carlo simulation based VaR: daily vs annual parameters
I am given the initial price, annualized return, and volatility of a security. I am trying to calculate annualized VaR using Monte Carlo simulation approach. To do this I will use the following ...
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203 views
Monte Carlo simulation error estimation
How does one estimate the error of a Monte Carlo simulation, for example, of the price of a European call under the Heston model with a given step size and number of paths?
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112 views
Anti-thetic sampling and second moment matching
Background:
This is in reference to ch 7 problem 10 of Mark Joshi's concepts of mathematical finance.
Question:
A normal random generator produces the following draws:
$$0.68, -0.31, -0.49, -0....
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172 views
Pricing of Swaption by Proxy and Monte Carlo
here's the problem.
Suppose you want to compute the price of a Call option on a Swap contract.
Let $T$ and $T+S$ the times (in year fraction) where the Swap lives and suppose that the fluxes of the ...
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2k views
Correlated assets in Monte Carlo simulation
I'm trying to simulate $N$ correlated assets in Excel in order to estimate a basket option price.
For 2 assets, I correlated the two random variables $X_1$ and $X_2$ and then simulate the ...
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120 views
Monte Carlo volatily
I was wondering if we could do a forecast on volatility using monte carlo on an underlying asset. For example EUR/USD :
Simulating a lot of possible paths on 1 year
then calculate the volatilty for ...
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0answers
288 views
Euler discretization of SDE, combined with antithetic sampling
let's say we have a GBM $dS_t = r S_t dt + \sigma S_t dW_t$, where $W_t$ is standard Brownian motion, and we have an European option $C$ with payoff $f(S_T)$. I want to use an Euler discretization ...
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0answers
254 views
Is using a Monte Carlo simulation sufficient for predicting probabilities that a stock will hit a certain price by a certain date?
Forgive my ignorance about my question. I understand a Monte Carlo simulation to basically be n times that the truth is checked in some historic data set. For stock ...
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320 views
Are there any papers measure the accuracy of various option pricing models against real market price?
There are many stochastic volatility option models not only require significant more computation/simulation comparing to the standard BSM model but also introdue large source of possible problems at ...
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90 views
Generating process for stock price paths in this paper?
I am reading Longstaff and Schwartz Valuing Aerican Options by Simulation because monte carlo simulations, especially their use in option pricing, is interesting to me. However, I am having some ...
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1answer
299 views
Payoff of a butterfly c++
I would like to price options (call, put,, butterfly) with monte-carlo method, but actually I need the expression of the butterflay payoff;
Could you ^please help me !
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1answer
371 views
CMS convexity adjustment in a range accrual Monte Carlo
I'm trying to price a CMS indexed range accrual using Monte Carlo simulations. Let's say i have n trajectories of ZC rates using G2++ model under risk neutral measure. My question is how do i take ...
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1answer
78 views
Given a particular Monte-Carlo simulation, how will a different correlated value change
I am currently working on a project at an investment bank regarding new accounting regulations on financial instruments. The task at hand it to understand the connection between a large array of ...
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1answer
194 views
Use random-shift Halton sequence to obtain 40 independent estimates for the price of a European call
Background Information:
Random-shift Halton sequence: Consider the first six Halton vectors in dimension $2$, using base $2$ and $3$:
$$\begin{bmatrix}
1/2\\
1/3
\end{bmatrix}, \begin{bmatrix}
1/4\\
...
-1
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1answer
561 views
quantstrat for backtesting vs. writing one's own code in R
I have invested a few years in learning R and have developed a number of Monte Carlo backtesting scripts. My question is this: In general, for a person with some experience writing R code who is ...
