Multilevel Monte Carlo with Numerical Smoothing for Robust and Efficient Computation of Probabilities and Densities

SIAM Journal on Scientific Computing, vol. 46, pp. A1514–A1548

Abstract

Abstract. The multilevel Monte Carlo (MLMC) method is highly efficient for estimating expectations of a functional of a solution to a stochastic differential equation (SDE). However, MLMC estimators may be unstable and have a poor (noncanonical) complexity in the case of low regularity of the functional. To overcome this issue, we extend our previously introduced idea of numerical smoothing in [ Quant. Finance, 23 (2023), pp. 209–227], in the context of deterministic quadrature methods to the MLMC setting. The numerical smoothing technique is based on root-finding methods combined with one-dimensional numerical integration with respect to a single well-chosen variable. This study is motivated by the computation of probabilities of events, pricing options with a discontinuous payoff, and density estimation problems for dynamics where the discretization of the underlying stochastic processes is necessary. The analysis and numerical experiments reveal that the numerical smoothing significantly improves the strong convergence and, consequently, the complexity and robustness (by making the kurtosis at deep levels bounded) of the MLMC method. In particular, we show that numerical smoothing enables recovering the MLMC complexities obtained for Lipschitz functionals due to the optimal variance decay rate when using the Euler–Maruyama scheme. For the Milstein scheme, numerical smoothing recovers the canonical MLMC complexity, even for the nonsmooth integrand mentioned above. Finally, our approach efficiently estimates univariate and multivariate density functions.

Authors 3

1. Christian Bayer

   Weierstrass Institute for Applied Analysis and Stochastics

   Affiliation as printed

   Weierstrass Institute for Applied Analysis and Stochastics (WIAS), 10117 Berlin, Germany

2. Chiheb Ben Hammouda

   Utrecht University

   Affiliation as printed

   Mathematical Institute, Utrecht University, 3508 TC Utrecht, The Netherlands

3. Raul F. Tempone Aachen Electrical and Mathematical Sciences and Engineering Division (CEMSE)

   RWTH Aachen University · King Abdullah University of Science and Technology

   Affiliation as printed

   King Abdullah University of Science and Technology (KAUST), Computer, Electrical and Mathematical Sciences & Engineering Division (CEMSE), Thuwal 23955, Kingdom of Saudi Arabia, and Alexander von Humboldt Professor in Mathematics for Uncertainty Quantification, RWTH Aachen University, 52062 Aachen, Germany