Asymptotic distribution of the EMS option price estimator

Citation
Jc. Duan et al., Asymptotic distribution of the EMS option price estimator, MANAG SCI, 47(8), 2001, pp. 1122-1132
Citations number
11
Categorie Soggetti
Management
Journal title
MANAGEMENT SCIENCE
ISSN journal
00251909 → ACNP
Volume
47
Issue
8
Year of publication
2001
Pages
1122 - 1132
Database
ISI
SICI code
0025-1909(200108)47:8<1122:ADOTEO>2.0.ZU;2-8
Abstract
Monte Carlo simulation is commonly used for computing prices of derivative securities when an analytical solution does not exist. Recently, a new simu lation technique known as empirical martingale simulation (EMS) has been pr oposed by Duan and Simonato (1998) as a way of improving simulation accurac y. EMS has one drawback however. Because of the dependency among sample pat hs created by the EMS adjustment, the standard error of the price estimate is not readily available from using one simulation sample. In this paper, w e develop a scheme to estimate the EMS accuracy. The EMS price estimator is first shown to have an asymptotically normal distribution. Through a simul ation study, we then find that the asymptotic normal distribution serves as a good approximation for samples consisting of as few as 500 simulation pa ths.