Nag Giles

Multilevel Monte Carlo
path simulation
Mike Giles
giles@comlab.ox.ac.uk
Oxford University Computing Laboratory

Oxford-Man Institute of Quantitative Finance
Acknowledgments: research funding from Microsoft and EPSRC, and

collaboration with Paul Glasserman (Columbia) and Ian Sloan, Frances Kuo (UNSW)
Multilevel Monte Carlo p. 1/41
Outline
Long-term objective is faster Monte Carlo simulation of path
dependent options to estimate values and Greeks.
Several ingredients, not yet all combined:
multilevel method
quasi-Monte Carlo
adjoint pathwise Greeks
parallel computing on NVIDIA graphics cards
Emphasis in this presentation is on multilevel method
Generic Problem
Stochastic differential equation with general drift and
volatility terms:
dS(t) = a(S, t) dt + b(S, t) dW (t)
We want to compute the expected value of an option

dependent on S(t). In the simplest case of European
options, it is a function of the terminal state
P = f (S(T ))
with a uniform Lipschitz bound,

|f (U ) f (V )| c kU V k ,
U, V.
Simplest MC Approach
Euler discretisation with timestep h:
Sbn+1 = Sbn + a(Sbn , tn ) h + b(Sbn , tn ) Wn
Estimator for expected payoff is an average of N

independent path simulations:
Yb = N 1
N
X
i=1
(i)
f (SbT /h )
weak convergence O(h) error in expected payoff

strong convergence O(h1/2 ) error in individual path
Simplest MC Approach
Mean Square Error is O
N 1
h2
first term comes from variance of estimator

second term comes from bias due to weak convergence
To make this O(2 ) requires
N = O(2 ),
h = O()
Aim is to improve this cost to O

possible, ideally close to 1.
cost = O(N h1 ) = O(3 )

p

, with p as small as
Note: for a relative error of = 0.001, the difference between

3 and 1 is huge.
Standard MC Improvements
variance reduction techniques (e.g. control variates,
stratified sampling) improve the constant factor in front
of 3 , sometimes spectacularly
improved second order weak convergence(e.g. through
Richardson extrapolation) leads to h = O( ), giving
p = 2.5
quasi-Monte Carlo reduces the number of samples
required, at best leading to N O(1), giving p 2 with
first order weak methods
Multilevel method gives p = 2 without QMC, and at best
p 1 with QMC.
Other Related Research

In Dec. 2005, Ahmed Kebaier published an article in
Annals of Applied Probability describing a two-level method

2.5
which reduces the cost to O
.
Also in Dec. 2005, Adam Speight wrote a working

paper describing a very similar multilevel use of control
variates.
There are also close similarities to a multilevel
technique developed by Stefan Heinrich for parametric
integration (Journal of Complexity, 1998)
Multilevel MC Approach
Consider multiple sets of simulations with different
timesteps hl = 2l T, l = 0, 1, . . . , L, and payoff Pbl
E[PbL ] = E[Pb0 ] +
L
X
l=1
E[Pbl Pbl1 ]
Expected value is same aim is to reduce variance of

estimator for a fixed computational cost.
Key point: approximate E[Pbl Pbl1 ] using Nl simulations
with Pbl and Pbl1 obtained using same Brownian path.
Ybl = Nl1
Nl
X
i=1
(i)
(i)
Pbl Pbl1
Discrete Brownian path at different levels
3.5
P0
P1
2.5
P2
P
1.5
P5
P
0.5
0
0.5
1
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Using independent paths for each level, the variance of the
combined estimator is
" L #
L
X
X
Ybl =
V
N 1 Vl ,
Vl V[Pbl Pbl1 ],
l
l=0
l=0
and the computational cost is proportional to
L
X
Nl h1
l .
l=0
Hence, the variance is minimised for a fixed

computational
p
cost by choosing Nl to be proportional to Vl hl .
The constant of proportionality can be chosen so that the
combined variance is O(2).
For the Euler discretisation and a Lipschitz payoff function
V[Pbl P ] = O(hl )
V[Pbl Pbl1 ] = O(hl )
and the optimal Nl is asymptotically proportional to hl .

To make the combined variance O(2 ) requires
Nl = O(2L hl ).
To make the bias O() requires

L = log2 1 + O(1)
hL = O().
Hence, we obtain an O(2 ) MSE for a computational cost

which is O(2L2 ) = O(2 (log )2 ).
Theorem: Let P be a functional of the solution of a stochastic o.d.e.,
bl the discrete approximation using a timestep hl = M l T .

and P
bl based on Nl Monte Carlo

If there exist independent estimators Y
samples, and positive constants 12 , , c1 , c2 , c3 such that
bl P ] c1 h
i) E[P
l
bl ] =
ii) E[Y
E[Pb0 ],
l=0
E[Pb Pb ], l > 0
l
l1
bl ] c2 N 1 h
iii) V[Y
l
l
bl , is bounded by
iv) Cl , the computational complexity of Y
Cl c3 Nl h1
l
then there exists a positive constant c4 such that for any < e1 there
are values L and Nl for which the multi-level estimator
Yb =
L
X
l=0
has Mean Square Error M SE E

Ybl ,
Yb E[P ]
with a computational complexity C with bound
2
< 2
2 ,
> 1,
c
4
C
c4 2 (log )2 , = 1,
c4 2(1)/ , 0 < < 1.
Milstein Scheme
The theorem suggests use of Milstein scheme
better strong convergence, same weak convergence
Generic scalar SDE:
dS(t) = a(S, t) dt + b(S, t) dW (t),
0 < t < T.
Milstein scheme:

Sbn+1 = Sbn + a h + b Wn + 12 b0 b (Wn )2 h .
Milstein Scheme
In scalar case:
O(h) strong convergence
O(2 ) complexity for Lipschitz payoffs trivial
O(2 ) complexity for Asian, lookback, barrier and
digital options using carefully constructed estimators
based on Brownian interpolation or extrapolation
Milstein Scheme
Key idea: within each timestep, model the behaviour as
simple Brownian motion conditional on the two end-points
b
S(t)
= Sbn + (t)(Sbn+1 Sbn )

+ bn W (t) Wn (t)(Wn+1 Wn ) ,
where
t tn
(t) =
tn+1 tn
There then exist analytic results for the distribution of the

min/max/average over each timstep.
Results
Geometric Brownian motion:
dS = r S dt + S dW,
0 < t < T,
with parameters T = 1, S(0) = 1, r = 0.05, = 0.2

European call option: exp(rT ) max(S(T ) 1, 0)
!
Z T
Asian option: exp(rT ) max T 1
S(t) dt 1, 0
0
Lookback option: exp(rT )
S(T ) min S(t)

0<t<T
Down-and-out barrier option: same as call provided

S(t) stays above B = 0.9
MLMC Results
GBM: European
0
10
log2 |mean|
log2 variance
15
10
20
15
P
25
P P
l
30
call
P P
l1
4
l
20
l1
4
l
MLMC Results
GBM: European
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
Std MC
MLMC
10
10
Cost
10
10
10
10
call
4
l
10
10
10
MLMC Results
GBM: Asian
0
10
log2 |mean|
log2 variance
15
10
20
15
P
25
P P
l
30
option
P P
l1
4
l
20
l1
4
l
MLMC Results
GBM: Asian
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
10
2 Cost
10
10
option
10
10
10
Std MC
MLMC
4
l
10
10
10
MLMC Results
GBM: lookback
0
10
log2 |mean|
log2 variance
15
10
20
15
P
25
P P
l
30
option
P P
l1
5
l
10
20
l1
5
l
10
MLMC Results
GBM: lookback
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
10
2 Cost
10
10
option
10
10
10
Std MC
MLMC
5
l
10
10
10
10
MLMC Results
GBM: barrier
0
10
log2 |mean|
log2 variance
15
10
20
15
P
25
P P
l
30
option
P P
l1
4
l
20
l1
4
l
MLMC Results
GBM: barrier
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
10
2 Cost
10
10
option
10
10
10
Std MC
MLMC
4
l
10
10
10
Milstein Scheme
Generic vector SDE:
dS(t) = a(S, t) dt + b(S, t) dW (t),
0 < t < T,
with correlation matrix (S, t) between elements of dW (t).

Milstein scheme:
Sbi,n+1 = Sbi,n + ai h + bij Wj,n

b
ij
+ 12
blk Wj,n Wk,n h jk Ajk,n
Sl
with implied summation, and Lvy areas defined as

Z tn+1
Ajk,n =
(Wj (t)Wj (tn )) dWk (Wk (t)Wk (tn )) dWj .
tn
Milstein Scheme
In vector case:
O(h) strong convergence if Lvy areas are simulated
correctly expensive
O(h1/2 ) strong convergence in general if Lvy areas are
omitted, except if a certain commutativity condition is
satisfied (useful for a number of real cases)
Lipschitz payoffs can be handled well using antithetic

variables
Other cases may require approximate simulation of
Lvy areas
Results
Heston model:
dS = r S dt + V S dW1 ,
0<t<T
2
dV = ( V ) dt + V dW2 ,
T = 1, S(0) = 1, V (0) = 0.04, r = 0.05,
= 0.2, = 5, = 0.25, = 0.5
MLMC Results
Heston model: European call
0
10
log2 |mean|
log2 variance
15
10
20
15
P
25
P P
l
30
P P
l1
4
l
20
l1
4
l
MLMC Results
Heston model: European call
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
Std MC
MLMC
10
10
Cost
10
10
10
10
4
l
10
10
10
Quasi-Monte Carlo
well-established technique for approximating
high-dimensional integrals
for finance applications see papers by lEcuyer and
book by Glasserman
Sobol sequences are perhaps most popular;
we use lattice rules (Sloan & Kuo)
two important ingredients for success:
randomized QMC for confidence intervals
good identification of dominant dimensions
(Brownian Bridge and/or PCA)
Quasi-Monte Carlo
Approximate high-dimensional hypercube integral
Z
f (x) dx
[0,1]d
by
1
N
N
1
X
i=0
where
x
f (x(i) )
(i)
i
z
=
N
and z is a d-dimensional generating vector.

Quasi-Monte Carlo
In the best cases, error is O(N 1 ) instead of O(N 1/2) but
without a confidence interval.
To get a confidence interval, let

i
(i)
z + x0 .
x =
N
where x0 is a random offset vector.
Using 32 different random offsets gives a confidence
interval in the usual way.
Quasi-Monte Carlo
For the path discretisation we can use
Wn = h 1 (xn ),
where 1 is the inverse cumulative Normal distribution.
Much better to use a Brownian Bridge construction:
x1
x2
x3 , x4
W (T )
W (T /2)
W (T /4), W (3T /4)
. . . and so on by recursive bisection
Multilevel QMC
rank-1 lattice rule developed by Sloan, Kuo &
Waterhouse at UNSW
32 randomly-shifted sets of QMC points
number of points in each set increased as needed to
achieved desired accuracy, based on confidence
interval estimate
results show QMC to be particularly effective on lowest
levels with low dimensionality
MLQMC Results
GBM: European call
0
5
5
15
log2 |mean|
log2 variance
10
20
25
30
40
15
1
16
256
4096
35
0
10
P P
l
4
l
20
l1
4
l
MLQMC Results
GBM: European call
6
10
10
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
10
Cost
10
10
10
2
10
10
Std QMC
MLQMC
4
l
10
10
10
MLQMC Results
GBM: barrier option
0
5
5
15
log2 |mean|
log2 variance
10
20
25
30
40
15
1
16
256
4096
35
0
10
P P
l
4
l
20
l1
4
l
MLQMC Results
GBM: barrier option
7
10
10
=0.00005
=0.0001
=0.0002
=0.0005
=0.001
10
10
Cost
10
10
Std QMC
MLQMC
10
10
10
10
4
l
10
10
10
Conclusions
Results so far:
much improved order of complexity
fairly easy to implement
significant benefits for model problems
However:
lots of scope for further development
multi-dimensional SDEs needing Lvy areas
adjoint Greeks and vibrato Monte Carlo
numerical analysis of algorithms
execution on NVIDIA graphics cards (128 cores)
need to test ideas on real finance applications
Papers
M.B. Giles, Multilevel Monte Carlo path simulation,
to appear in Operations Research, 2007.
M.B. Giles, Improved multilevel convergence using the
Milstein scheme, to appear in MCQMC06 proceedings,
Springer-Verlag, 2007.
M.B. Giles, Multilevel quasi-Monte Carlo path simulation,
submitted to Journal of Computational Finance, 2007.
www.comlab.ox.ac.uk/mike.giles/finance.html
Email: giles@comlab.ox.ac.uk

Nag Giles

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Nag Giles

Diunggah oleh

Hak Cipta:

Format Tersedia

Multilevel Monte Carlo

Oxford University Computing Laboratory

Acknowledgments: research funding from Microsoft and EPSRC, and

Multilevel Monte Carlo p. 1/41

Multilevel Monte Carlo p. 2/41

We want to compute the expected value of an option

with a uniform Lipschitz bound,

Estimator for expected payoff is an average of N

weak convergence O(h) error in expected payoff

first term comes from variance of estimator

Aim is to improve this cost to O

cost = O(N h1 ) = O(3 )

Note: for a relative error of = 0.001, the difference between

Other Related Research

Also in Dec. 2005, Adam Speight wrote a working

Multilevel Monte Carlo p. 7/41

Expected value is same aim is to reduce variance of

Multilevel Monte Carlo p. 8/41

Multilevel Monte Carlo p. 9/41

and the computational cost is proportional to

Hence, the variance is minimised for a fixed

Multilevel Monte Carlo p. 10/41

V[Pbl Pbl1 ] = O(hl )

and the optimal Nl is asymptotically proportional to hl .

To make the bias O() requires

Hence, we obtain an O(2 ) MSE for a computational cost

bl the discrete approximation using a timestep hl = M l T .

bl based on Nl Monte Carlo

Multilevel Monte Carlo p. 12/41

has Mean Square Error M SE E

with a computational complexity C with bound

c4 2(1)/ , 0 < < 1.

Multilevel Monte Carlo p. 13/41

Sbn+1 = Sbn + a h + b Wn + 12 b0 b (Wn )2 h .

Multilevel Monte Carlo p. 14/41

Multilevel Monte Carlo p. 15/41

There then exist analytic results for the distribution of the

Multilevel Monte Carlo p. 16/41

with parameters T = 1, S(0) = 1, r = 0.05, = 0.2

Lookback option: exp(rT )

S(T ) min S(t)

Down-and-out barrier option: same as call provided

Multilevel Monte Carlo p. 18/41

Multilevel Monte Carlo p. 19/41

Multilevel Monte Carlo p. 20/41

Multilevel Monte Carlo p. 21/41

Multilevel Monte Carlo p. 23/41

Multilevel Monte Carlo p. 24/41

Multilevel Monte Carlo p. 25/41

with correlation matrix (S, t) between elements of dW (t).

with implied summation, and Lvy areas defined as

Multilevel Monte Carlo p. 26/41

Lipschitz payoffs can be handled well using antithetic

Multilevel Monte Carlo p. 27/41

Multilevel Monte Carlo p. 28/41

Multilevel Monte Carlo p. 29/41

Multilevel Monte Carlo p. 30/41

Multilevel Monte Carlo p. 31/41

and z is a d-dimensional generating vector.

Multilevel Monte Carlo p. 33/41

. . . and so on by recursive bisection

Multilevel Monte Carlo p. 34/41

Multilevel Monte Carlo p. 35/41