Efficient Control Variates and Strategies for Bermudan Swaptions in a Libor Market Model
This paper concerns the problem of valuing Bermudan swaptions in a Libor market model. In particular we consider various eﬃciency improvement techniques for a Monte Carlo based valuation method. We suggest a simplification of the Andersen (2000) exercise strategy and find it to be much more eﬃcient. Furthermore, we test a range of control variates for Bermudan swaptions using a control variate technique for American options proposed in Rasmussen (2002). Application of these eﬃciency improvements in the Primal-Dual simulation algorithm of Andersen & Broadie (2001) improves both upper and lower bounds for the price estimates. For the Primal-Dual simulation algorithm we examine the variance-bias trade-oﬀ between the numbers of outer an inner paths. Finally, we demonstrate that the presence of stochastic volatility increases the expected losses from using the simple strategy in Andersen (2000).
|Date of creation:||09 May 2002|
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