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A Practical Monte Carlo Method for Pricing Equity-Linked Securities with Time-Dependent Volatility and Interest Rate

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Abstract

We develop a fast Monte Carlo simulation (MCS) for pricing equity-linked securities (ELS) with time-dependent volatility and interest rate. In this paper, we extend a recently developed fast MCS for pricing ELS. In the previous model, both the volatility and interest rate were constant. However, in the real finance market, volatility and interest rate are time-dependent parameters. In this work, we approximate the time-dependent parameters by piecewise constant functions and apply Brownian bridge technique. We present some numerical results of the proposed method. The computational results demonstrate the fastness of the proposed algorithm with equivalent accuracy with standard MCS. It is important for traders and hedgers considering derivatives to evaluate prices and risks quickly and accurately. Therefore, our algorithm will be very useful to practitioners in the ELS market.

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Acknowledgements

The corresponding author (J. S. Kim) was supported by the BK21 Plus program from the Ministry of Education of Korea. The authors appreciate the reviewers for their constructive comments on this article.

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Authors and Affiliations

  1. Department of Mathematics, Korea University, Seoul, 02841, Republic of Korea

    Sangkwon Kim, Jisang Lyu, Eunchae Park, Chaeyoung Lee & Junseok Kim

  2. Department of Financial Engineering, Korea University, Seoul, 02841, Republic of Korea

    Wonjin Lee & Hanbyeol Jang

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  1. Sangkwon Kim
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  2. Jisang Lyu
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  3. Wonjin Lee
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  4. Eunchae Park
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  6. Chaeyoung Lee
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  7. Junseok Kim
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Correspondence to Junseok Kim.

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Kim, S., Lyu, J., Lee, W. et al. A Practical Monte Carlo Method for Pricing Equity-Linked Securities with Time-Dependent Volatility and Interest Rate. Comput Econ (2023). https://doi.org/10.1007/s10614-023-10394-3

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