Iterative construction of the optimal Bermudan stopping time
AbstractWe present an iterative procedure for computing the optimal Bermudan stopping time, hence the Bermudan Snell envelope. The method produces an increasing sequence of approximations of the Snell envelope from below, which coincide with the Snell envelope after finitely many steps. Then, by duality, the method induces a convergent sequence of upper bounds as well. In a Markovian setting the presented procedure allows to calculate approximative solutions with only a few nestings of conditional expectations and is therefore tailor-made for a plain Monte Carlo implementation. The method may be considered generic for all discrete optimal stopping problems. The power of the procedure is demonstrated for Bermudan swaptions in a full factor LIBOR market model. Copyright Springer-Verlag Berlin/Heidelberg 2006
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Volume (Year): 10 (2006)
Issue (Month): 1 (01)
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- Beveridge, Christopher & Joshi, Mark & Tang, Robert, 2013. "Practical policy iteration: Generic methods for obtaining rapid and tight bounds for Bermudan exotic derivatives using Monte Carlo simulation," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1342-1361.
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SFB 649 Discussion Papers
SFB649DP2006-051, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Denis Belomestny & Grigori Milstein & Vladimir Spokoiny, 2009. "Regression methods in pricing American and Bermudan options using consumption processes," Quantitative Finance, Taylor & Francis Journals, vol. 9(3), pages 315-327.
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