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Examining the Efficiency of American Put Option Pricing by Monte Carlo Methods with Variance Reduction

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  • George Chang

Abstract

We apply the Monte Carlo simulation algorithm developed by Broadie and Glasserman (1997) and the control variate technique first introduced to asset pricing via simulation by Boyle (1977) to examine the efficiency of American put option pricing via this combined method. The importance and effectiveness of variance reduction is clearly demonstrated in our simulation results. We also found that the control variates technique does not work as well for deep-in-the-money American put options. This is because deep-in-the-money American options are more likely to be exercised early, thus the value of the American options are less in line (or less correlated) with those of their European counterparts.

Suggested Citation

  • George Chang, 2018. "Examining the Efficiency of American Put Option Pricing by Monte Carlo Methods with Variance Reduction," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 10-13, February.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:2:p:10-13
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    References listed on IDEAS

    as
    1. Hull, John & White, Alan, 1988. "The Use of the Control Variate Technique in Option Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(3), pages 237-251, September.
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    More about this item

    Keywords

    option pricing; american put option; monte carlo simulation; variance reduction;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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