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.
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
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