Choosing Benchmark Models for Path-Dependent Option Simulations

Summary

The document frames a model-selection question for Monte Carlo research on path-dependent options. The researcher plans to use a model-free method to generate price paths and wants several established models as benchmarks for comparing its performance. Three candidate models are named: Black–Scholes, Merton’s jump-diffusion model, and Heston’s stochastic-volatility model. The request asks whether these are commonly used in practice and whether additional models should be considered.

No response or empirical comparison is included, so the document does not establish how prevalent the listed models are or recommend alternatives. It also gives no option type, asset class, calibration setup, or criteria for judging simulation quality. Those details matter because path dependence makes the distribution of entire trajectories relevant, not only terminal prices. The material is therefore a research question and a concise inventory of candidate benchmarks, rather than a method specification or evidence that any one model is suitable for a particular application.

Key ideas

• The research compares a model-free path simulation approach with parametric Monte Carlo benchmarks.
• Black–Scholes, Merton jump diffusion, and Heston stochastic volatility are listed as candidates.
• Path-dependent options require attention to simulated trajectories over time.
• The document offers no answer or comparison establishing model prevalence or suitability.
• Benchmark choice depends on the option and the criteria used to evaluate simulations.

Tags

# Benchmark Model for Path-Dependant Monte Carlo Simulations?


# Benchmark Model for Path-Dependant Monte Carlo Simulations?












As part of my research for my masters thesis, I'm testing out the effectiveness of some different models in Monte Carlo simulations for path dependant options.

I will be attempting a model-free approach to simulating price paths so these will simply be used as a benchmark. I want to choose a few models which are valid and commonly used for MC simulations today.

So far I have implemented Black-Scholes (the classic), Merton's Jump Diffusion model and a Heston stochastic volatility model. Are these commonly used in practice today? Are there any other models which should be included?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.