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On the use and improvement of Hull and White’s control variate technique

Shackleton, M B and Chung, S L (2003) On the use and improvement of Hull and White’s control variate technique. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    Our article provides a study on the use and improvement of Hull and White’s (1988) control variate technique in pricing options. It contributes to the literature in two ways. Firstly we show that it is not optimal to use the entire error of a control variate against its known price (usually a closed-form solution) to correct and improve the unknown error of the unknown price of a complex option and we derive a better error correction fraction. Secondly while Hull and White only advocated the use of the simplest European option control variate, we show how to choose better controls to reduce pricing errors more effectively and we discuss the role of so called static hedges as the best theoretical control variates

    Item Type: Monograph (Working Paper)
    Uncontrolled Keywords: Control variate ; American option ; exponential exercise boundary ; static
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48688
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:06
    Refereed?: No
    Published?: Published
    Last Modified: 17 Sep 2013 18:25
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48688

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