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Regression methods in pricing American and Bermudan options using consumption processes
[journal article]
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
sequenti... view more
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.... view less
Classification
Economic Statistics, Econometrics, Business Informatics
Financial Planning, Accountancy
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
https://doi.org/10.1080/14697680802165736
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)