Monte Carlo Evaluation Of American Options Using Consumption Processes
AbstractWe develop a new approach for pricing both continuous-time and discrete-time American options which is based on the fact that any American option is equivalent to a European one with a consumption process involved. This approach admits the construction of an upper bound (a lower bound) on the true price using some lower bound (an upper bound) by Monte Carlo simulation. A number of effective estimators of upper and lower bounds with the reduced variance are proposed. The method is supported by numerical experiments which look promising.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 09 (2006)
Issue (Month): 04 ()
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- Denis Belomestny & Grigori N. Milstein & Vladimir Spokoiny, 2006.
"Regression methods in pricing American and Bermudan options using consumption processes,"
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 and Francis Journals, vol. 9(3), pages 315-327.
- John Schoenmakers, 2012. "A pure martingale dual for multiple stopping," Finance and Stochastics, Springer, vol. 16(2), pages 319-334, April.
- Denis Belomestny & G. Milstein & John Schoenmakers, 2010. "Sensitivities for Bermudan options by regression methods," Decisions in Economics and Finance, Springer, vol. 33(2), pages 117-138, November.
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