Monte Carlo Pricing of American Options Using Nonparametric Regression
AbstractThis paper provides an introduction to Monte Carlo algorithms for pricing American options written on multiple assets, with special emphasis on methods that can be applied in a multi-dimensional setting. Simulated paths can be used to estimate by nonparametric regression the continuation value of the option or the optimal exercise policy and the value functions can then be computed by backward induction. The flexibility of nonparametric regression allows to obtain accurate price estimates with remarkable speed. For illustrative purposes we price one- and two-dimensional American options.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0207007.
Length: 345 pages
Date of creation: 19 Aug 2002
Date of revision: 04 Mar 2003
Note: Type of Document - pdf; prepared on OzTeX on Macintosh; to print on Laser printer; pages: 345,395,4323247 ; figures: included
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Option pricing; American options; Monte Carlo; nonparametric regression;
Find related papers by JEL classification:
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-08-29 (All new papers)
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