Adaptive Simulation Algorithms for Pricing American and Bermudian Options by Local Analysis of Financial Market
AbstractHere we develop an approach for efficient pricing discrete-time American and Bermudan options which employs the fact that such options are equivalent to the European ones with a consumption, combined with analysis of the market model over a small number of steps ahead. This approach allows constructing both upper and low bounds for the true price by Monte Carlo simulations. An adaptive choice of local low bounds and use of the kernel interpolation technique enhance efficiency of the whole procedure, which is supported by numerical experiments.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-038.
Length: 16 pages
Date of creation: Apr 2006
Date of revision:
American and Bermudan options; Lower and Upper bounds; Monte Carlo simulation; Variance reduction;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-13 (All new papers)
- NEP-CMP-2006-05-13 (Computational Economics)
- NEP-FIN-2006-05-13 (Finance)
- NEP-FMK-2006-05-13 (Financial Markets)
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- Denis Belomestny & Grigori Milstein & Vladimir Spokoiny, 2009.
"Regression methods in pricing American and Bermudan options using consumption processes,"
Taylor and Francis Journals, vol. 9(3), pages 315-327.
- 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 & Pavel V. Gapeev, 2006. "An Iteration Procedure for Solving Integral Equations Related to Optimal Stopping Problems," SFB 649 Discussion Papers SFB649DP2006-043, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- 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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