medium · Quantitative Finance numerical
Why is the Cholesky Decomposition frequently used in multivariate Monte Carlo simulations of correlated asset prices?
- It ensures the simulated asset prices under the model can never turn negative.
- It speeds up random number generation by reducing the simulation's dimensionality.
- It is used instead to calculate the implied volatility of a basket of listed index options.
- It transforms independent random draws into draws with a target covariance structure.
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