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A Hybrid LSMC-PDE Method for Bermudan Option Pricing under the Gatheral Double Mean-Reverting Model

Author

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  • Mara Kalicanin Dimitrov
  • Ying Ni

Abstract

We study Bermudan option pricing under the Gatheral Double Mean-Reverting (GDMR) stochastic volatility model. The model features a variance process together with a stochastic long-run mean variance process and allows Constant Elasticity of Variance (CEV)-type exponents in the diffusion coefficients. This model is attractive since it provides a flexible specification for volatility dynamics. However, the pricing of early-exercise derivatives under the GDMR model remains largely unexplored in the literature. To address this challenge, we adapt a Hybrid Least-Squares Monte Carlo-Partial Differential Equation (LSMC-PDE) framework to the GDMR model and provide a detailed model-specific implementation. Conditioning on simulated variance paths, the pricing problem reduces to a one-dimensional problem in the asset price, which is solved by a Fourier-based approach, while the remaining dependence on the variance variables is approximated by least-squares regression. Our numerical experiments demonstrate that the Hybrid LSMC-PDE approach yields accurate pricing estimates and often lower pricing errors than plain LSMC, particularly for low and moderate numbers of simulation paths, showing the benefit of using the model structure in early-exercise option pricing.

Suggested Citation

  • Mara Kalicanin Dimitrov & Ying Ni, 2026. "A Hybrid LSMC-PDE Method for Bermudan Option Pricing under the Gatheral Double Mean-Reverting Model," Papers 2606.11237, arXiv.org.
  • Handle: RePEc:arx:papers:2606.11237
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    References listed on IDEAS

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    5. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
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