A Wiener-Hopf Monte Carlo simulation technique for Lévy processes

A. Kuznetsov, A. E. Kyprianou, J. C. Pardo, K. Van Schaik

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We develop a completely new and straightforward method for simulating the joint law of the position and running maximum at a fixed time of a general Lévy process with a view to application in insurance and financial mathematics. Although different, our method takes lessons from Carr's so-called "Canadization" technique as well as Doney's method of stochastic bounds for Lévy processes; see Carr [Rev. Fin. Studies 11 (1998) 597-626] and Doney [Ann. Probab. 32 (2004) 1545-1552].We rely fundamentally on theWiener- Hopf decomposition for Lévy processes as well as taking advantage of recent developments in factorization techniques of the latter theory due to Vigon [Simplifiez vos Lévy en titillant la factorization deWiener-Hopf (2002) Laboratoire de Mathématiques de L'INSA de Rouen] and Kuznetsov [Ann. Appl. Probab. 20 (2010) 1801-1830]. We illustrate our Wiener-Hopf Monte Carlo method on a number of different processes, including a new family of Lévy processes called hypergeometric Lévy processes. Moreover, we illustrate the robustness of working with a Wiener-Hopf decomposition with two extensions. The first extension shows that if one can successfully simulate for a given Lévy processes then one can successfully simulate for any independent sum of the latter process and a compound Poisson process. The second extension illustrates how one may produce a straightforward approximation for simulating the two-sided exit problem. © Institute of Mathematical Statistics, 2011.
    Original languageEnglish
    Pages (from-to)2171-2190
    Number of pages19
    JournalAnnals of Applied Probability
    Volume21
    Issue number6
    DOIs
    Publication statusPublished - Dec 2011

    Keywords

    • Exotic option pricing
    • Lévy processes
    • Wiener-Hopf factorization

    Fingerprint

    Dive into the research topics of 'A Wiener-Hopf Monte Carlo simulation technique for Lévy processes'. Together they form a unique fingerprint.

    Cite this