Multilevel Monte Carlo for exponential Lévy models

Abstract

We apply the multilevel Monte Carlo method for option pricing problems using exponential Lévy models with a uniform timestep discretisation. For lookback and barrier options, we derive estimates of the convergence rate of the error introduced by the discrete monitoring of the running supremum of a broad class of Lévy processes. We then use these to obtain upper bounds on the multilevel Monte Carlo variance convergence rate for the variance gamma, NIG and $\alpha$ -stable processes. We also provide an analysis of a trapezoidal approximation for Asian options. Our method is illustrated by numerical experiments.

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