Adjoint methods for computing sensitivities in local volatility surfaces

In this paper we present the adjoint method of computing sensitivities of option prices with respect to nodes in the local volatility surface. We first introduce the concept of algorithmic differentiation and how it relates to\ud path-wise sensitivity computations within a Monte Carlo framework. We explain the two approaches available: forward mode and adjoint mode. We illustrate these concepts on the simple example of a model with a geometric Brownian motion driving the underlying price process, for which\ud we compute the Delta and Vega in forward and adjoint mode. We then go on to explain in full detail how to apply these ideas to a model where the underlying has a volatility term defined by a local volatility surface. We provide source codes for both the simple and the more complex case and\ud analyze numerical results to show the strengths of the adjoint approach

Multigrid Methods in Lattice Field Computations

The multigrid methodology is reviewed. By integrating numerical processes at all scales of a problem, it seeks to perform various computational tasks at a cost that rises as slowly as possible as a function of $n$, the number of degrees of freedom in the problem. Current and potential benefits for lattice field computations are outlined. They include: $O(n)$ solution of Dirac equations; just $O(1)$ operations in updating the solution (upon any local change of data, including the gauge field); similar efficiency in gauge fixing and updating; $O(1)$ operations in updating the inverse matrix and in calculating the change in the logarithm of its determinant; $O(n)$ operations per producing each independent configuration in statistical simulations (eliminating CSD), and, more important, effectively just $O(1)$ operations per each independent measurement (eliminating the volume factor as well). These potential capabilities have been demonstrated on simple model problems. Extensions to real life are explored.Comment: 4

Multilevel Markov Chain Monte Carlo Method for High-Contrast Single-Phase Flow Problems

In this paper we propose a general framework for the uncertainty quantification of quantities of interest for high-contrast single-phase flow problems. It is based on the generalized multiscale finite element method (GMsFEM) and multilevel Monte Carlo (MLMC) methods. The former provides a hierarchy of approximations of different resolution, whereas the latter gives an efficient way to estimate quantities of interest using samples on different levels. The number of basis functions in the online GMsFEM stage can be varied to determine the solution resolution and the computational cost, and to efficiently generate samples at different levels. In particular, it is cheap to generate samples on coarse grids but with low resolution, and it is expensive to generate samples on fine grids with high accuracy. By suitably choosing the number of samples at different levels, one can leverage the expensive computation in larger fine-grid spaces toward smaller coarse-grid spaces, while retaining the accuracy of the final Monte Carlo estimate. Further, we describe a multilevel Markov chain Monte Carlo method, which sequentially screens the proposal with different levels of approximations and reduces the number of evaluations required on fine grids, while combining the samples at different levels to arrive at an accurate estimate. The framework seamlessly integrates the multiscale features of the GMsFEM with the multilevel feature of the MLMC methods following the work in \cite{ketelson2013}, and our numerical experiments illustrate its efficiency and accuracy in comparison with standard Monte Carlo estimates.Comment: 29 pages, 6 figure

Parameter estimation by implicit sampling

Implicit sampling is a weighted sampling method that is used in data assimilation, where one sequentially updates estimates of the state of a stochastic model based on a stream of noisy or incomplete data. Here we describe how to use implicit sampling in parameter estimation problems, where the goal is to find parameters of a numerical model, e.g.~a partial differential equation (PDE), such that the output of the numerical model is compatible with (noisy) data. We use the Bayesian approach to parameter estimation, in which a posterior probability density describes the probability of the parameter conditioned on data and compute an empirical estimate of this posterior with implicit sampling. Our approach generates independent samples, so that some of the practical difficulties one encounters with Markov Chain Monte Carlo methods, e.g.~burn-in time or correlations among dependent samples, are avoided. We describe a new implementation of implicit sampling for parameter estimation problems that makes use of multiple grids (coarse to fine) and BFGS optimization coupled to adjoint equations for the required gradient calculations. The implementation is "dimension independent", in the sense that a well-defined finite dimensional subspace is sampled as the mesh used for discretization of the PDE is refined. We illustrate the algorithm with an example where we estimate a diffusion coefficient in an elliptic equation from sparse and noisy pressure measurements. In the example, dimension\slash mesh-independence is achieved via Karhunen-Lo\`{e}ve expansions

A sparse grid approach to balance sheet risk measurement

In this work, we present a numerical method based on a sparse grid approximation to compute the loss distribution of the balance sheet of a financial or an insurance company. We first describe, in a stylised way, the assets and liabilities dynamics that are used for the numerical estimation of the balance sheet distribution. For the pricing and hedging model, we chose a classical Black & Scholes model with a stochastic interest rate following a Hull & White model. The risk management model describing the evolution of the parameters of the pricing and hedging model is a Gaussian model. The new numerical method is compared with the traditional nested simulation approach. We review the convergence of both methods to estimate the risk indicators under consideration. Finally, we provide numerical results showing that the sparse grid approach is extremely competitive for models with moderate dimension.Comment: 27 pages, 7 figures. CEMRACS 201

On local Fourier analysis of multigrid methods for PDEs with jumping and random coefficients

In this paper, we propose a novel non-standard Local Fourier Analysis (LFA) variant for accurately predicting the multigrid convergence of problems with random and jumping coefficients. This LFA method is based on a specific basis of the Fourier space rather than the commonly used Fourier modes. To show the utility of this analysis, we consider, as an example, a simple cell-centered multigrid method for solving a steady-state single phase flow problem in a random porous medium. We successfully demonstrate the prediction capability of the proposed LFA using a number of challenging benchmark problems. The information provided by this analysis helps us to estimate a-priori the time needed for solving certain uncertainty quantification problems by means of a multigrid multilevel Monte Carlo method