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Authors: Koji Fukuda and Yasuyuki Kudo

Affiliation: Hitachi and Ltd., Japan

Keyword(s): Monte-Carlo Simulation, Sensitivity, Likelihood Ratio, Score Function, Fixed-Sample-Path Principle.

Related Ontology Subjects/Areas/Topics: Formal Methods ; Mathematical Simulation ; Risk Analysis ; Simulation and Modeling ; Stochastic Modeling and Simulation

Abstract: The likelihood ratio method (LRM) is an efficient indirect method for estimating the sensitivity of given expectations with respect to parameters by Monte-Carlo simulation. The restriction on application of LRM to real-world problems is that it requires explicit knowledge of the probability density function (pdf) to calculate the score function. In this study, a fixed-sample-path method is proposed, which derives the score function required for LRM not via the pdf but directly from a constructive algorithm that computes the sample path from parameters and random numbers. The boundary residual, which represents the correction associated with the change of the distribution range of the random variables in LRM, is also derived. Some examples including the estimation of risk measures (Greeks) of option and financial flow-of-funds networks showed the effectiveness of the fixed-sample-path method.

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Paper citation in several formats:
Fukuda, K. and Kudo, Y. (2014). Sensitivity Estimation by Monte-Carlo Simulation Using Likelihood Ratio Method with Fixed-Sample-Path Principle. In Proceedings of the 4th International Conference on Simulation and Modeling Methodologies, Technologies and Applications - SIMULTECH; ISBN 978-989-758-038-3; ISSN 2184-2841, SciTePress, pages 309-320. DOI: 10.5220/0005001603090320

@conference{simultech14,
author={Koji Fukuda. and Yasuyuki Kudo.},
title={Sensitivity Estimation by Monte-Carlo Simulation Using Likelihood Ratio Method with Fixed-Sample-Path Principle},
booktitle={Proceedings of the 4th International Conference on Simulation and Modeling Methodologies, Technologies and Applications - SIMULTECH},
year={2014},
pages={309-320},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0005001603090320},
isbn={978-989-758-038-3},
issn={2184-2841},
}

TY - CONF

JO - Proceedings of the 4th International Conference on Simulation and Modeling Methodologies, Technologies and Applications - SIMULTECH
TI - Sensitivity Estimation by Monte-Carlo Simulation Using Likelihood Ratio Method with Fixed-Sample-Path Principle
SN - 978-989-758-038-3
IS - 2184-2841
AU - Fukuda, K.
AU - Kudo, Y.
PY - 2014
SP - 309
EP - 320
DO - 10.5220/0005001603090320
PB - SciTePress

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