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Article

Comonotonic Monte Carlo Simulation and Its Applications in Option Pricing and Quantification of Risk

Alain Chateauneuf, Mina Mostoufi and David Vyncke
The Journal of Derivatives Fall 2016, 24 (1) 18-28; DOI: https://doi.org/10.3905/jod.2016.24.1.018
Alain Chateauneuf
is a professor emeritus at IPAG Business School and Paris School of Economics at the Université de Paris I in Paris, France.
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  • For correspondence: alain.chateauneuf@univ-paris1.fr
Mina Mostoufi
is a researcher in the Paris School of Economics at the Université de Paris I in Paris, France, and at Ghent University in Ghent, Belgium.
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  • For correspondence: mina.mostoufi@malix.univ-paris1.fr
David Vyncke
is an associate professor at Ghent University in Ghent, Belgium.
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  • For correspondence: david.vyncke@ugent.be
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Abstract

For many kinds of derivative valuation problems, especially those that try for greater realism using return processes that are more consistent with empirical evidence, Monte Carlo simulation is the only feasible solution technique. Among the well-known strategies to improve its efficiency, the use of a well-chosen control variate is often very effective. But a good selection can make a lot of difference. This article explains how the mathematical concept of comonotonicity can be applied as a new way to create a control variate. A remarkable improvement in performance can be achieved using the comonotonic upper bound as the control variate. The article illustrates the power of Comonotonic Monte Carlo simulation in estimating tail value at risk and pricing arithmetic Asian options.

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The Journal of Derivatives: 24 (1)
The Journal of Derivatives
Vol. 24, Issue 1
Fall 2016
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Comonotonic Monte Carlo Simulation and Its Applications in Option Pricing and Quantification of Risk
Alain Chateauneuf, Mina Mostoufi, David Vyncke
The Journal of Derivatives Aug 2016, 24 (1) 18-28; DOI: 10.3905/jod.2016.24.1.018

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Comonotonic Monte Carlo Simulation and Its Applications in Option Pricing and Quantification of Risk
Alain Chateauneuf, Mina Mostoufi, David Vyncke
The Journal of Derivatives Aug 2016, 24 (1) 18-28; DOI: 10.3905/jod.2016.24.1.018
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  • Article
    • Abstract
    • MONTE CARLO SIMULATION WITH CONTROL VARIATES
    • COMONOTONIC CONTROL VARIATE
    • COMONOTONIC CONTROL VARIATE FOR ASIAN OPTIONS, BASKET OPTIONS AND TAIL VALUE-AT-RISK
    • CONCLUSION
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