Least Squares Importance Sampling for Libor Market Models

Wilmott Magazine, September 2007

20 Pages Posted: 12 Nov 2007 Last revised: 3 Sep 2008

Abstract

A recently introduced Importance Sampling strategy based on a least squares optimization is applied to the Monte Carlo simulation of Libor Market Models. Such Least Squares Importance Sampling (LSIS) allows the automatic optimization of the sampling distribution within a trial class by means of a quick presimulation algorithm of straightforward implementation. With several numerical examples we show that LSIS can be extremely effective in reducing the variance of Monte Carlo estimators often resulting, especially when combined with stratified sampling, in computational speed-ups of orders of magnitude.

Keywords: Monte Carlo Simulations, Variance Reduction Techniques, Importance Sampling, Derivatives Pricing, Libor Market Models

Suggested Citation

Capriotti, Luca, Least Squares Importance Sampling for Libor Market Models. Wilmott Magazine, September 2007, Available at SSRN: https://ssrn.com/abstract=1029133

Luca Capriotti (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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