Monte-Carlo error on implied volatility

gibuccheri · October 22nd, 2015, 6:14 am

Assume you run a MC simulation to price an option. You also get your MC error, given a certain confidence level. My question is: what is the MC error on implied volatility?I simply take MC price minus/plus the MC error and invert the BS equation to get the corresponding confidence interval for implied volatility.Is this the "best" way ?

bearish · October 22nd, 2015, 9:24 am

What you describe is a decent first order approximation. The more precise (and computationally more expensive) way would be to calculate the implied volatility from each simulated price and then proceed to produce the corresponding average and standard error estimates.

Buscacio · October 30th, 2015, 12:13 pm

Creating a time series for them?