Efficient Accelerating Method of Conditional Monte Carlo Simulation for Two factor Option Pricing Model

Abstract:

The conditional Monte Carlo method was constructed for pricing European options under stochastic volatility model, and then an efficient control variate was presented based on the Martingale representation theorem. Numerical tests show that conditional Monte Carlo simulations based on the martingale control variate method can reduce simulation error. Moreover the dependence of the efficiency of simulation on model parameters is not sensitive.

Key words:European options pricing; stochastic volatility model; conditional Monte Carlo simulation; martingale control variates