Title :
Problems with Monte Carlo simulation in the pricing of contingent claims
Author :
Molle, John Dalle ; Zapatero, Fernando
Author_Institution :
ITAM, Mexico
Abstract :
Very often the dynamics of the interest rate and/or the risk premium do not allow to obtain a close form solution for the price of the pure discount bond. One possible approach is to use Monte Carlo simulation. In order to do this we first have to simulate the path of the stochastic variables. After doing this a number of times, we average over the different realizations. The result will be the price of the bond. In fact, very often it is assumed that the equity risk premium is zero. This is a convenient simplification, but it takes away some of the richness of equilibrium models that assume risk-averse investors
Keywords :
Monte Carlo methods; costing; financial data processing; normal distribution; probability; risk management; simulation; stochastic processes; Monte Carlo simulation; close form solution; contingent claim pricing; equilibrium models; equity risk premium; interest rate dynamics; pure discount bond price; risk premium dynamics; risk-averse investors; stochastic variable path simulation; Bonding; Economic indicators; Extraterrestrial measurements; Filtration; Gaussian distribution; Pricing; Security; State-space methods; Stochastic processes; Tiles;
Conference_Titel :
Computational Intelligence for Financial Engineering, 1996., Proceedings of the IEEE/IAFE 1996 Conference on
Conference_Location :
New York City, NY
Print_ISBN :
0-7803-3236-9
DOI :
10.1109/CIFER.1996.501834
