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Faster valuation of financial derivatives

Paskov, Spassimir; Traub, Joseph F.

Monte Carlo simulation is widely used to value complex financial instruments. An alternative to Monte Carlo is to use "low discrepancy" methods. Theory suggests that low discrepancy methods might be superior to the Monte Carlo method. We compared the performance of low discrepancy methods with Monte Carlo on a Collateralized Mortgage Obligation (CMO) with ten tranches. We found that a particular low discrepancy method based on Sobol points consistently outperforms Monte Carlo. Although our tests were for a CMO, we believe it will be advantageous to use the Sobol method for many other types of instruments. We have made major improvements in published routines for generating Sobol points which we have embedded in a software system called FINDER.

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More About This Work

Academic Units
Computer Science
Publisher
Department of Computer Science, Columbia University
Series
Columbia University Computer Science Technical Reports, CUCS-030-96
Published Here
April 25, 2011