Valuing American Derivatives by Least Squares Methods
Least Squares estimators are notoriously known to generate sub-optimal exercise decisions when determining the optimal stopping time. The consequence is that the price of the option is underestimated. We show how variance reduction methods can be implemented to obtain more accurate option prices. We also extend the Longsta¤ and Schwartz (2001) method to price American options under stochastic volatility. These are two important contributions that are particularly relevant for practitioners. Finally, we extend the Glasserman and Yu (2004b) methodology to price Asian options and basket options.
|Date of creation:||2008|
|Contact details of provider:|| Postal: 31 Buccleuch Place, EH8 9JT, Edinburgh|
Web page: http://www.sire.ac.uk
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luciano Fratocchi & Alberto Onetti & Alessia Pisoni & Marco Talaia, 2007. "Location of value added activities in hi-tech industries. The case of pharma-biotech firms in Italy," Economics and Quantitative Methods qf0708, Department of Economics, University of Insubria.
- Mark Broadie & Menghui Cao, 2008. "Improved lower and upper bound algorithms for pricing American options by simulation," Quantitative Finance, Taylor & Francis Journals, vol. 8(8), pages 845-861.
- Philip Protter & Emmanuelle Clément & Damien Lamberton, 2002. "An analysis of a least squares regression method for American option pricing," Finance and Stochastics, Springer, vol. 6(4), pages 449-471.
- Boyle, Phelim & Broadie, Mark & Glasserman, Paul, 1997. "Monte Carlo methods for security pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1267-1321, June.
- L. C. G. Rogers, 2002. "Monte Carlo valuation of American options," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 271-286.
- Lars Stentoft, 2004. "Assessing the Least Squares Monte-Carlo Approach to American Option Valuation," Review of Derivatives Research, Springer, vol. 7(2), pages 129-168, 08.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
When requesting a correction, please mention this item's handle: RePEc:edn:sirdps:57. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gina Reddie)
If references are entirely missing, you can add them using this form.