Simulation Methods for Sensitivities of Expectations with Nested Discontinuity

Project: Research

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In this proposal, we consider a sensitivity estimation problem for expectations with nested discontinuity, which is a new problem to the simulation literature and has been motivated by application in hedging of structured financial derivatives and risk analysis of credit portfolios. We propose new simulation method for estimating the sensitivities with nested discontinuity, based on an extension of a result in a previous work by the PI and his coauthors. In particular, by analyzing the continuity properties of the integrand, we derive a chain rule for taking sensitivities for integrands with nested discontinuity, which naturally leads to efficient kernel estimators. The proposed method can be applied to several important applications, including the hedging of financial derivatives with nested discontinuity, risk analysis of credit portfolios, and simulation-based statistical inference, which shall be investigated in-depth in this project. It is expected that the findings of this project may serve as a viable simulation tool for this new class of sensitivity estimation problem, and provide insights into the above applications.  


Project number9043242
Grant typeGRF
Effective start/end date1/01/22 → …