SC²S Colloquium - Mai 26, 2011

Date:	Mai 26, 2011
Room:	02.07.023
Time:	15:00 pm, s.t.

Donglin Wang: Sparse Grid Combination Technique for Regression Problems in Finance (MA)

The risk management of portfolios containing multiple financial derivatives (such as options) is highly computational intensive. One of the methods required by the bank’s regulatory authorities is the Potential Future Exposure (PFE) computation. This method is usually implemented such that it involves a nested Monte-Carlo simulation. That means, on each simulated market scenario path, at each time step, thousands of Monte-Carlo paths are generated again. This makes this technique time-consuming. In order to avoid nested Monte-Carlo simulation, previous work suggested to apply the regression technique at each time step to obtain the price of the financial derivatives and thus the portfolio value as a function of the underlying factors as stock prices, volatilities, interest rate. This work compares the accuracy of sparse grid combination technique and optimized combination technique with direct regression on sparse grids as well as regression on thin-plate spline basis for several PFE examples.