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Research output: Working paper
Research output: Working paper
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TY - UNPB
T1 - On the use and improvement of Hull and White’s control variate technique
AU - Shackleton, M B
AU - Chung, S L
PY - 2003
Y1 - 2003
N2 - 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
AB - 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
KW - Control variate
KW - American option
KW - exponential exercise boundary
KW - static
M3 - Working paper
T3 - Accounting and Finance Working Paper Series
BT - On the use and improvement of Hull and White’s control variate technique
PB - The Department of Accounting and Finance
CY - Lancaster University
ER -