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Applications of Malliavin calculus to Monte-Carlo methods in finance. II

Author

Listed:
  • Eric Fournié

    (PARIBAS Capital Markets, 10, Harewood Avenue, NW1 6AA London, England)

  • Jean-Michel Lasry

    (PARIBAS Capital Markets, 10, Harewood Avenue, NW1 6AA London, England)

  • Pierre-Louis Lions

    (Ceremade, UMR 9534, Université Paris-Dauphine, Place Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France)

  • Jérôme Lebuchoux

    (PARIBAS Capital Markets, 10, Harewood Avenue, NW1 6AA London, England)

Abstract

This paper is the sequel of Part I [1], where we showed how to use the so-called Malliavin calculus in order to devise efficient Monte-Carlo (numerical) methods for Finance. First, we return to the formulas developed in [1] concerning the "greeks" used in European options, and we answer to the question of optimal weight functional in the sense of minimal variance. Then, we investigate the use of Malliavin calculus to compute conditional expectations. The integration by part formula provides a powerful tool when used in the framework of Monte Carlo simulation. It allows to compute everywhere, on a single set of trajectories starting at one point, solution of general options related PDEs. Our final application of Malliavin calculus concerns the use of Girsanov transforms involving anticipating drifts. We give an example in numerical Finance of such a transform which gives reduction of variance via importance sampling. Finally, we include two appendices that are concerned with the PDE interpretation of the formulas presented in [1] for the delta of a European option and with the connections between the functional dependence of some random variables and their Malliavin derivatives.

Suggested Citation

  • Eric Fournié & Jean-Michel Lasry & Pierre-Louis Lions & Jérôme Lebuchoux, 2001. "Applications of Malliavin calculus to Monte-Carlo methods in finance. II," Finance and Stochastics, Springer, vol. 5(2), pages 201-236.
    • Handle: RePEc:spr:finsto:v:5:y:2001:i:2:p:201-236
    Note: received: February 1999; final version received: January 2000
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    More about this item

    Keywords

    Monte Carlo methods; Malliavin calculus; hedge ratios and greeks; conditional expectations; PDE; anticipative Girsanov transform; functional dependence;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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