Weak Multilevel Path Simulation for Jump-Diffusion Assets

Authors
1 Faculty of Mathematical Sciences, University of Mazandaran, Babolsar, Iran
2 Faculty of Mathematical Sciences, Isfahan University of Technology, Isfahan, Iran
Abstract
This paper, inspired by recent advances in the application of the multilevel Monte-Carlo (MLMC) approach to Lévy driven assets, is based on the valuation of financial derivatives. First, using the weak Euler method the numerical estimate of the underlying asset, which satisfies a multi-dimensional stochastic differential equation with Lévy noise, is calculated and then applying the weak multilevel Monte-Carlo method the expected price is obtained. In this paper, as an improvement of Belomestny’s work and with a new approach in the theory, we express and prove the convergence theorems in spacefor and not only 2. We also seek to implement the weak MLMC algorithm for nonlinear equations with dependent components and . In the end, we show numerical experiments when applied to different types of processes with call options../files/site1/files/72/14Abstract.pdf
Keywords

1. Averina T. A., Artemev S. S., "A new family of numerical methods for solving stochastic differential equations", Soviet. Math. Dokl.,33(3) (1986) 736-738.## 2. Bates David S., "Jumps and stochastic volatility: Exchange rate processes implicit in Deutsche mark options", The Review of Financial Studies, 9(1) (1996) 69-107. ## 3. Belomestny Denis, Nagapetyan, Tigran. "Multilevel path simulation for weak approximation schemes with application to Lévy-driven SDEs", Bernoulli, 23(2) (2017) 927-950. ## 4. Bruti-Liberati Nicola, Platen Eckhard., "On weak predictor-corrector schemes for jump-diffusion processes in finance", Quantitative Finance Resaerch Center (2006). ## 5. Burrage Kevin, Burrage P. M., "High strong order explicit Runge-Kutta methods for stochastic ordinary differential equations", Applied Numerical Mathematics, 22 (1) (1996) 81-102. ## 6. Costabile Massimo, Leccadito Arturo, Massabó Ivar, Russo Emilio, "Option pricing under regime-switching jump-diffusion models", Journal of Computational and Applied Mathematics, 256 (2014) 152-167. ## 7. Drummond I. T., Hoch A., Horgan R. R., "Numerical integration of stochastic differential equations with variable diffusivity", Journal of Physics A: Mathematical and General, 19 (18) (1986) 3871-3881. ## 8. Giles Michael B., Lukasz Szpruch, "Antithetic multilevel Monte-Carlo estimation for multi-dimensional SDEs without Lévy area simulation", The Annals of Applied Probability, 24 (4) (2014) 1585-1620. ## 9. Giles Michael B., "Multilevel Monte-Carlo path simulation", Operations Research, 56 (3) (2008) 607-617. 10. Giles Michael B., Higham Desmond J., Mao Xuerong, "Analysing multi-level Monte Carlo for options with non-globally Lipschitz payoff", Finance and Stochastics, 13 (3) (2009) 403-413. ## 11. Kloeden Peter E., Platen Eckhard, "Numerical solution of stochastic differential equations", volume 23 of Applications of Mathematics (New York) Springer-Verlag, Corrected Third Printing (1999). ## 12. Kloeden Peter E., Platen Eckhard, Hofmann N., "Extrapolation methods for the weak approximation of Itô diffusions", SIAM journal on numerical analysis, 32 (5) (1995) 1519-1534. ## 13.Kunita Hiroshi, "Stochastic Flows and Stochastic Differential Equations", Vol. 24, Cambridge university press (1997). ## 14. Marxen Henning, "The multilevel Monte-Carlo method used on a Lévy driven SDE", Monte-Carlo Methods and Applications, 16 (2) (2010) 167-190. ## 15. Milstein Grigorii N., "Numerical integration of stochastic differential equations", Volume 313 of Springer Science & Business Media (1994). ## 16. Mikulevičius Remigijus, Platen Eckhard, "Time discrete Taylor approximations for Itô processes with jump component", Mathematische Nachrichten, 138 (1) (1988) 93-104. ## 17. Ninomiya Syoiti, Victoir Nicolas, "Weak approximation of stochastic differential equations and application to derivative pricing", Applied Mathematical Finance, 15 (2) (2008) 107-121. ## 18. Platen Eckhard, Bruti-Liberati Nicola, "Numerical Solution of Stochastic Differential Equations with Jumps in Finance", volume 64 of Springer (2010). ## 19. Platen Eckhard, Rebolledo Rolando, "Weak convergence of semimartingales and discretisation methods. Stochastic Processes and their Applications", 20 (1) (1985) 41-58. ## 20. Protter Philip, Talay Denis, "The Euler scheme for Lévy driven stochastic differential equations", The Annals of Probability, 25 (1) (1997) 393-423. ## 21. Siopacha Maria, Teichmann Josef, "Weak and strong Taylor methods for numerical solutions of stochastic differential equations", Quantitative Finance, 11 (4) (2011) 517-528. 22. Xia Yuan, Giles Michael B., "Multilevel path simulation for jump-diffusion SDEs", Monte-Carlo, and Quasi Monte-Carlo Methods 2010, Springer, Berlin, Heidelberg (2012) 695-708. ##