JavaScript Finance: Monte Carlo simulation

The Monte Carlo simulation is a mathematical technique that uses random sampling to generate multiple sets of values for a given model or function. This allows us to calculate the expected value and risk associated with the model or function, and to explore the uncertainty and sensitivity of the model or function to changes in the input variables.

To implement a Monte Carlo simulation in JavaScript, we can use the built-in Math.random() function to generate random numbers, and then use these numbers to sample from the distribution of the input variables. We can then use these samples to evaluate the model or function, and to calculate the expected value and risk associated with the model or function.

Here is an example of a Monte Carlo simulation in JavaScript that calculates the expected value and risk associated with the price of a stock:

// Define the model or function
function stockPrice(currentPrice, expectedReturn, volatility) {
  // Sample from the distribution of the input variables
  let randomReturn = Math.random() * 2 * expectedReturn - expectedReturn;
  let randomVolatility = Math.random() * 2 * volatility - volatility;

  // Calculate the expected value and risk associated with the model or function
  let expectedValue = currentPrice * (1 + randomReturn);
  let risk = currentPrice * randomVolatility;

  return { expectedValue, risk };
}

// Run the Monte Carlo simulation
let simulations = 1000;
let results = [];
for (let i = 0; i < simulations; i++) {
  let result = stockPrice(100, 0.1, 0.2);
  results.push(result);
}

// Calculate the average expected value and risk
let expectedValues = results.map(result => result.expectedValue);
let risks = results.map(result => result.risk);
let averageExpectedValue = expectedValues.reduce((a, b) => a + b) / simulations;
let averageRisk = risks.reduce((a, b) => a + b) / simulations;

// Print the results
console.log(`Average expected value: ${averageExpectedValue}`);
console.log(`Average risk: ${averageRisk}`);

In this example, we define the stockPrice function as our model or function, and then sample from the distribution of the input variables (the current price, expected return, and volatility) using the Math.random() function. We then calculate the expected value and risk associated with the model or function, and return these values as an object.

Next, we run the Monte Carlo simulation by calling the stockPrice function multiple times (in this case, 1000 times) and storing the results in an array. We then calculate the average expected value and risk by summing the values in the array and dividing by the number of simulations. Finally, we print the results to the console.

This is just one example of how to implement a Monte Carlo simulation in JavaScript. There are many different variations and approaches to this technique, and the specific implementation will depend on the specific model or function that we are trying to evaluate.