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Regression methods in pricing American and Bermudan options using consumption processes

[journal article]

Belomestny, Denis; Spokoiny, Vladimir; Milstein, Grigori

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Please use the following Persistent Identifier (PID) to cite this document:http://nbn-resolving.de/urn:nbn:de:0168-ssoar-221242

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Abstract Numerical algorithms for efficient pricing multidimensional discrete-time American and Bermudan options are constructed using regression methods and a new approach for computing upper bounds of the options' price. Using the sample space with payoffs at the optimal stopping times, we propose sequential estimates for continuation values, values of the consumption process, and stopping times on the sample paths. The approach allows constructing both lower and upper bounds for the price by Monte Carlo simulations. The algorithms are tested by pricing Bermudan max-calls and swaptions in the Libor market model.
Classification Financial Planning, Accountancy; Economic Statistics, Econometrics, Business Informatics
Method theory application
Free Keywords American and Bermudan options; Error bounds; Monte Carlo; Consumption process; Regression methods; Optimal stopping times
Document language English
Publication Year 2009
Page/Pages p. 315-327
Journal Quantitative Finance, 9 (2009) 3
DOI http://dx.doi.org/10.1080/14697680802165736
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)