Monte Carlo evaluation of sensitivities in computational finance

In computational finance, Monte Carlo simulation is used to compute the correct prices for financial options. More important, however, is the ability to compute the so-called "Greeks'', the first and second order derivatives of the prices with respect to input parameters such as the current asset price, interest rate and level of volatility.\ud \ud This paper discusses the three main approaches to computing Greeks: finite difference, likelihood ratio method (LRM) and pathwise sensitivity calculation. The last of these has an adjoint implementation with a computational cost which is independent of the number of first derivatives to be calculated. We explain how the practical development of adjoint codes is greatly assisted by using Algorithmic Differentiation, and in particular discuss the performance achieved by the FADBAD++ software package which is based on templates and operator overloading within C++.\ud \ud The pathwise approach is not applicable when the financial payoff function is not differentiable, and even when the payoff is differentiable, the use of scripting in real-world implementations means it can be very difficult in practice to evaluate the derivative of very complex financial products. A new idea is presented to address these limitations by combining the adjoint pathwise approach for the stochastic path evolution with LRM for the payoff evaluation

Smoking Adjoints: fast evaluation of Greeks in Monte Carlo calculations

This paper presents an adjoint method to accelerate the calculation of Greeks by Monte Carlo simulation. The method calculates price sensitivities along each path; but in contrast to a forward pathwise calculation, it works backward recursively using adjoint variables. Along each path, the forward and adjoint implementations produce the same values, but the adjoint method rearranges the calculations to generate potential computational savings. The adjoint method outperforms a forward implementation in calculating the sensitivities of a small number of outputs to a large number of inputs. This applies, for example, in estimating the sensitivities of an interest rate derivatives book to multiple points along an initial forward curve or the sensitivities of an equity derivatives book to multiple points on a volatility surface. We illustrate the application of the method in the setting of the LIBOR market model. Numerical results confirm that the computational advantage of the adjoint method grows in proportion to the number of initial forward rates

Differentiable Programming Tensor Networks

Differentiable programming is a fresh programming paradigm which composes parameterized algorithmic components and trains them using automatic differentiation (AD). The concept emerges from deep learning but is not only limited to training neural networks. We present theory and practice of programming tensor network algorithms in a fully differentiable way. By formulating the tensor network algorithm as a computation graph, one can compute higher order derivatives of the program accurately and efficiently using AD. We present essential techniques to differentiate through the tensor networks contractions, including stable AD for tensor decomposition and efficient backpropagation through fixed point iterations. As a demonstration, we compute the specific heat of the Ising model directly by taking the second order derivative of the free energy obtained in the tensor renormalization group calculation. Next, we perform gradient based variational optimization of infinite projected entangled pair states for quantum antiferromagnetic Heisenberg model and obtain start-of-the-art variational energy and magnetization with moderate efforts. Differentiable programming removes laborious human efforts in deriving and implementing analytical gradients for tensor network programs, which opens the door to more innovations in tensor network algorithms and applications.Comment: Typos corrected, discussion and refs added; revised version accepted for publication in PRX. Source code available at https://github.com/wangleiphy/tensorgra

Sensitivity analysis and parameter estimation for distributed hydrological modeling: potential of variational methods

Variational methods are widely used for the analysis and control of computationally intensive spatially distributed systems. In particular, the adjoint state method enables a very efficient calculation of the derivatives of an objective function (response function to be analysed or cost function to be optimised) with respect to model inputs. In this contribution, it is shown that the potential of variational methods for distributed catchment scale hydrology should be considered. A distributed flash flood model, coupling kinematic wave overland flow and Green Ampt infiltration, is applied to a small catchment of the Thoré basin and used as a relatively simple (synthetic observations) but didactic application case. It is shown that forward and adjoint sensitivity analysis provide a local but extensive insight on the relation between the assigned model parameters and the simulated hydrological response. Spatially distributed parameter sensitivities can be obtained for a very modest calculation effort (~6 times the computing time of a single model run) and the singular value decomposition (SVD) of the Jacobian matrix provides an interesting perspective for the analysis of the rainfall-runoff relation. For the estimation of model parameters, adjoint-based derivatives were found exceedingly efficient in driving a bound-constrained quasi-Newton algorithm. The reference parameter set is retrieved independently from the optimization initial condition when the very common dimension reduction strategy (i.e. scalar multipliers) is adopted. Furthermore, the sensitivity analysis results suggest that most of the variability in this high-dimensional parameter space can be captured with a few orthogonal directions. A parametrization based on the SVD leading singular vectors was found very promising but should be combined with another regularization strategy in order to prevent overfitting

Investigation of Adjoint Based Shape Optimization Techniques in NASCART-GT using Automatic Reverse Differentiation

Automated shape optimization involves making suitable modifications to a geometry that can lead to significant improvements in aerodynamic performance. Currently available mid-fdelity Aerodynamic Optimizers cannot be utilized in the late stages of the design process for performing minor, but consequential, tweaks in geometry. Automated shape optimization involves making suitable modifications to a geometry that can lead to significant improvements in aerodynamic performance. Currently available mid-fidelity Aerodynamic Optimizers cannot be utilized in the late stages of the design process for performing minor, but consequential, tweaks in geometry. High-fidelity shape optimization techniques are explored which, even though computationally demanding, are invaluable since they can account for realistic effects like turbulence and viscocity. The high computational costs associated with the optimization have been avoided by using an indirect optimization approach, which was used to dcouple the effect of the flow field variables on the gradients involved. The main challenge while performing the optimization was to maintain low sensitivity to the number of input design variables. This necessitated the use of Reverse Automatic differentiation tools to generate the gradient. All efforts have been made to keep computational costs to a minimum, thereby enabling hi-fidelity optimization to be used even in the initial design stages. A preliminary roadmap has been laid out for an initial implementation of optimization algorithms using the adjoint approach, into the high fidelity CFD code NASCART-GT.High-fidelity shape optimization techniques are explored which, even though computationally demanding, are invaluable since they can account for realistic effects like turbulence and viscocity. The high computational costs associated with the optimization have been avoided by using an indirect optimization approach, which was used to dcouple the effect of the flow field variables on the gradients involved. The main challenge while performing the optimization was to maintain low sensitivity to the number of input design variables. This necessitated the use of Reverse Automatic differentiation tools to generate the gradient. All efforts have been made to keep computational costs to a minimum, thereby enabling hi-fidelity optimization to be used even in the initial design stages. A preliminary roadmap has been laid out for an initial implementation of optimization algorithms using the adjoint approach, into the high fidelity CFD code NASCART-GT.Ruffin, Stephen - Faculty Mentor ; Feron, Eric - Committee Member/Second Reader ; Sankar, Lakshmi - Committee Member/Second Reade