IDEAS home Printed from https://ideas.repec.org/a/rsk/journ0/2160470.html
   My bibliography  Save this article

Fast drift-approximated pricing in the BGM model

Author

Listed:
  • Raoul Pietersz
  • Antoon Pelsser
  • Marcel van Regenmortel

Abstract

ABSTRACT It is demonstrated that the forward rates process discretized by a single time step together with a separability assumption on the volatility function allows for representation by a low-dimensional Markov process. This in turn leads to efficient pricing by, for example, finite differences. We then develop a discretization based on the Brownian bridge that is especially designed to have high accuracy for single time stepping. The scheme is proven to converge weakly with order one. We compare the single time step method for pricing on a grid with multi-step Monte Carlo simulation for a Bermudan swaption, reporting a computational speed increase by a factor 10, yet maintaining sufficiently accurate pricing.

Suggested Citation

  • Raoul Pietersz & Antoon Pelsser & Marcel van Regenmortel, . "Fast drift-approximated pricing in the BGM model," Journal of Computational Finance, Journal of Computational Finance.
    • Handle: RePEc:rsk:journ0:2160470
    as

    Download full text from publisher

    File URL: https://www.risk.net/journal-of-computational-finance/2160470/fast-drift-approximated-pricing-in-the-bgm-model
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rsk:journ0:2160470. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Paine (email available below). General contact details of provider: https://www.risk.net/journal-of-computational-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.