Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger
Valuation of mortgage-backed securities using Brownian bridges to reduce effective dimension
Russel E. Caflisch, William Morokoff, Art Owen
Abstract
ABSTRACT
The quasi-Monte Carlo method for financial valuation and other integration problems has error bounds of size O((log N)k N-1), or even O((log N)k N-3/2), which suggests significantly better performance than the error size O(N-1/2) for standard Monte Carlo. But in high-dimensional problems, this benefit might not appear at feasible sample sizes. Substantial improvements from quasi-Monte Carlo integration have, however, been reported for problems such as the valuation of mortgage-backed securities, in dimensions as high as 360. The authors believe that this is due to a lower effective dimension of the integrand in those cases. This paper defines the effective dimension and shows in examples how the effective dimension may be reduced by using a Brownian bridge representation.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net