An Efficient Algorithm for Simulating the Drawdown Stopping Time and the Running Maximum of a Brownian Motion

Angelos Dassios; Jia Wei Lim

doi:10.1007/s11009-017-9542-y

An Efficient Algorithm for Simulating the Drawdown Stopping Time and the Running Maximum of a Brownian Motion

Angelos Dassios, Jia Wei Lim^*

^*Corresponding author for this work

Research output: Contribution to journal › Article (Academic Journal) › peer-review

4 Citations (Scopus)

217 Downloads (Pure)

Abstract

We define the drawdown stopping time of a Brownian motion as the first time its drawdown reaches a duration of length 1. In this paper, we propose an efficient algorithm to efficiently simulate the drawdown stopping time and the associated maximum at this time. The method is straightforward and fast to implement, and avoids simulating sample paths thus eliminating discretisation bias. We show how the simulation algorithm is useful for pricing more complicated derivatives such as multiple drawdown options.

Original language	English
Pages (from-to)	189-204
Number of pages	16
Journal	Methodology and Computing in Applied Probability
Volume	20
Issue number	1
Early online date	25 Jan 2017
DOIs	https://doi.org/10.1007/s11009-017-9542-y
Publication status	Published - 1 Mar 2018

Keywords

Drawdown stopping time
Monte Carlo simulation
Multiple drawdown options

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An Efficient Algorithm for Simulating the Drawdown Stopping Time and the Running Maximum of a Brownian Motion

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Keywords

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