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An Aspect of Optimal Regression Design for LSMC

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  • Christian Wei{ss}
  • Zoran Nikoli'c

Abstract

Practitioners sometimes suggest to use a combination of Sobol sequences and orthonormal polynomials when applying an LSMC algorithm for evaluation of option prices or in the context of risk capital calculation under the Solvency II regime. In this paper, we give a theoretical justification why good implementations of an LSMC algorithm should indeed combine these two features in order to assure numerical stability. Moreover, an explicit bound for the number of outer scenarios necessary to guarantee a prescribed degree of numerical stability is derived. We embed our observations into a coherent presentation of the theoretical background of LSMC in the insurance setting.

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  • Christian Wei{ss} & Zoran Nikoli'c, 2018. "An Aspect of Optimal Regression Design for LSMC," Papers 1811.08509, arXiv.org, revised May 2019.
  • Handle: RePEc:arx:papers:1811.08509
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    References listed on IDEAS

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    1. Carriere, Jacques F., 1996. "Valuation of the early-exercise price for options using simulations and nonparametric regression," Insurance: Mathematics and Economics, Elsevier, vol. 19(1), pages 19-30, December.
    2. Michael B. Gordy & Sandeep Juneja, 2010. "Nested Simulation in Portfolio Risk Measurement," Management Science, INFORMS, vol. 56(10), pages 1833-1848, October.
    3. Newey, Whitney K., 1997. "Convergence rates and asymptotic normality for series estimators," Journal of Econometrics, Elsevier, vol. 79(1), pages 147-168, July.
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