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Enhanced policy iteration for American options via scenario selection
[Zeitschriftenartikel]
Abstract Kolodko and Schoenmakers (2006) and Bender and Schoenmakers (2006) introduced a policy iteration that allows the achievement of a tight lower approximations of the price for early exercise options via a nested Monte Carlo simulation in a Markovian setting. In this paper we enhance the algorithm by a... mehr
Kolodko and Schoenmakers (2006) and Bender and Schoenmakers (2006) introduced a policy iteration that allows the achievement of a tight lower approximations of the price for early exercise options via a nested Monte Carlo simulation in a Markovian setting. In this paper we enhance the algorithm by a scenario selection method. It is demonstrated by numerical examples that the scenario selection can significantly reduce the number of inner simulations actually performed, and thus can greatly speed up the method (by up to a factor of 15 in some examples). Moreover, it is shown that the modified algorithm retains the desirable properties of the original, such as the monotone improvement property, termination after a finite number of iteration steps, and numerical stability.... weniger
Klassifikation
Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Allgemeines, spezielle Theorien und "Schulen", Methoden, Entwicklung und Geschichte der Wirtschaftswissenschaften
Freie Schlagwörter
American-style derivative securities; Monte Carlo methods; Optimal policies; Pricing of derivatives securities
Sprache Dokument
Englisch
Publikationsjahr
2008
Seitenangabe
S. 135-146
Zeitschriftentitel
Quantitative Finance, 8 (2008) 2
DOI
https://doi.org/10.1080/14697680701253013
Status
Postprint; begutachtet (peer reviewed)
Lizenz
PEER Licence Agreement (applicable only to documents from PEER project)