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IAI Actuarial Core Principles · Economic Modelling · Valuing benefit guarantees using simulation

Which technique reduces the variance of a Monte Carlo guarantee cost estimate without increasing the number of simulations?

Antithetic variates reduce variance. Each simulated path is paired with one using the negated random draws, giving negatively correlated payoffs, so the averaged estimate has a lower standard error for the same number of simulations. The other options bias the result.

  1. AUsing antithetic variates, pairing each path with one built from the negated random drawsCorrect
  2. BUsing the same single random number for every time step
  3. CRemoving all paths where the guarantee pays nothing
  4. DReplacing the volatility with zero
  5. Discarding the lowest fund outcomes

Explanation

Antithetic variates pair each path with its mirror, producing negatively correlated payoffs whose average has lower variance. The other options bias the estimate or distort the distribution.

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