Efficient Counterfactual Estimation of Conditional Greeks via Malliavin-based Weak Derivatives

Abstract

We study counterfactual gradient estimation of conditional loss functionals of diffusion processes. In quantitative finance, these gradients are known as conditional Greeks: the sensitivity of expected market values, conditioned on some event of interest. The difficulty is that when the conditioning event has vanishing or zero probability, naive Monte Carlo estimators are prohibitively inefficient; kernel smoothing, though common, suffers from slow convergence. We propose a two-stage kernel-free methodology. First, we show using Malliavin calculus that the conditional loss functional of a diffusion process admits an exact representation as a Skorohod integral, yielding classical Monte-Carlo estimator variance and convergence rates. Second, we establish that a weak derivative estimate of the conditional loss functional with respect to model parameters can be evaluated algorithmically with constant variance, in contrast to the widely used score function method whose variance grows linearly in the sample path length. Together, these results yield an efficient framework for counterfactual conditional stochastic gradient algorithms and financial Greek computations in rare-event regimes.