T-Copula Generation For Control Variates

Hormann, Wolfgang
Sak, Halis
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Elsevier Science Bv, Po Box 211, 1000 Ae Amsterdam, Netherlands
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The standard method for generating multi-t vectors is simple and convenient but it has the disadvantage that the generated multi-normal and multi-t vectors are not similar. For t-copula models this destroys much of the variance reduction when using the result of the multi-normal model as external control variate. Therefore we develop a new generation method for multi-t vectors. It is based on the polar method and numerical inversion, and generates multi-normal and multi-t vectors that are very similar. Numerical experiments with simple functions of the weighted sum of t-copula vectors and with pricing European basket options with a t-copula model confirm that the obtained variance reduction factors of the new method are high; 2-100 times higher than when using the standard generation method. (C) 2010 IMACS. Published by Elsevier B.V. All rights reserved.

Monte Carlo simulation , t-Copula , Control variate , Polar method , risk , kontrol değişken , polar yöntem