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Sample recycling method – a new approach to efficient nested Monte Carlo simulations

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  • Feng, Runhuan
  • Li, Peng

Abstract

Nested stochastic modeling has been on the rise in many fields of the financial industry. Such modeling arises whenever certain components of a stochastic model are stochastically determined by other models. There are at least two main areas of applications including (1) portfolio risk management in the banking sector and (2) principle-based reserving and capital requirements in the insurance sector. As financial instrument values often change with economic fundamentals, the risk management of a portfolio (outer loop) often requires the assessment of financial positions subject to changes in risk factors in the immediate future. The valuation of financial position (inner loop) is based on projections of cashflows and risk factors into the distant future. The nesting of such stochastic modeling can be computationally challenging.

Suggested Citation

  • Feng, Runhuan & Li, Peng, 2022. "Sample recycling method – a new approach to efficient nested Monte Carlo simulations," Insurance: Mathematics and Economics, Elsevier, vol. 105(C), pages 336-359.
    • Handle: RePEc:eee:insuma:v:105:y:2022:i:c:p:336-359
    DOI: 10.1016/j.insmatheco.2022.04.012
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    Citations

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    Cited by:

    1. Gijs Mast & Xiaoyu Shen & Fang Fang, 2023. "Fast calculation of Counterparty Credit exposures and associated sensitivities using fourier series expansion," Papers 2311.12575, arXiv.org.
    2. Dang, Ou & Feng, Mingbin & Hardy, Mary R., 2023. "Two-stage nested simulation of tail risk measurement: A likelihood ratio approach," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 1-24.
    3. Shuai Yang & Kenneth Q. Zhou, 2023. "On Risk Management of Mortality and Longevity Capital Requirement: A Predictive Simulation Approach," Risks, MDPI, vol. 11(12), pages 1-18, November.

    More about this item

    Keywords

    Nested simulation; Risk estimation; Change of measure; Density-ratio estimation; Sample recycling method;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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