Department of Economics and Business Economics

Mikko Pakkanen

Turbocharging Monte Carlo pricing for the rough Bergomi model

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • Ryan McCrickerd, Imperial Coll London, Imperial College London, Dept Math
  • ,
  • Mikko S. Pakkanen

The rough Bergomi model, introduced by Bayer et al. [Quant. Finance, 2016, 16(6), 887-904], is one of the recent rough volatility models that are consistent with the stylised fact of implied volatility surfaces being essentially time-invariant, and are able to capture the term structure of skew observed in equity markets. In the absence of analytical European option pricing methods for the model, we focus on reducing the runtime-adjusted variance of Monte Carlo implied volatilities, thereby contributing to the model's calibration by simulation. We employ a novel composition of variance reduction methods, immediately applicable to any conditionally log-normal stochastic volatility model. Assuming one targets implied volatility estimates with a given degree of confidence, thus calibration RMSE, the results we demonstrate equate to significant runtime reductions-roughly 20 times on average, across different correlation regimes.

Original languageEnglish
JournalQuantitative Finance
Volume18
Issue11
Pages (from-to)1877-1886
Number of pages10
ISSN1469-7688
DOIs
Publication statusPublished - 2018
Externally publishedYes

    Research areas

  • Rough volatility, Implied volatility, Option pricing, Monte Carlo, Variance reduction, STOCHASTIC VOLATILITY

See relations at Aarhus University Citationformats

ID: 153128695