Variance comparison between infinitesimal perturbation analysis and likelihood ratio estimators to stochastic gradient |
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Institution: | 1. School of Business, Stevens Institute of Technology, United States;2. Lingnan College, Sun Yat-sen University, China;3. Department of Statistics and Actuarial Science, University of Waterloo, Canada |
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Abstract: | We theoretically compare variances between the Infinitesimal Perturbation Analysis (IPA) estimator and the Likelihood Ratio (LR) estimator to Monte Carlo gradient for stochastic systems. The results presented in Cui et al. (2020) 2] on variance comparison between these two estimators are substantially improved. We also prove a practically interesting result that the IPA estimators to European vanilla and arithmetic Asian options' Delta, respectively, have smaller variance when the underlying asset's return process is independent with the initial price and square integrable. |
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Keywords: | Stochastic gradient Infinitesimal perturbation analysis Likelihood ratio Variance comparison Option delta |
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