B Cassella and GO Roberts
Exact Monte Carlo Simulation of Killed Diffusions
Date: November 2007
Abstract: We describe and implement a novel methodology for Monte Carlo simulation of one-dimensional killed diﬀusions. The proposed estimators represent an unbiased and eﬃcient alternative to current Monte Carlo estimators based on discretization methods for the cases when the finitedimensional distributions of the process are unknown. For barrier option pricing in finance, we design a suitable Monte Carlo algorithm both for the single barrier case and the double barrier case. Results from numerical investigations are in excellent agreement with the theoretical predictions.