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 -