On the Robustness of the Snell envelope

Pierre del Moral (), Peng Hu (), Nadia Oudjane () and Bruno Remillard ()
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Pierre del Moral: ALEA - Advanced Learning Evolutionary Algorithms - Centre Inria de l'Université de Bordeaux - Inria - Institut National de Recherche en Informatique et en Automatique - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique
Peng Hu: ALEA - Advanced Learning Evolutionary Algorithms - Centre Inria de l'Université de Bordeaux - Inria - Institut National de Recherche en Informatique et en Automatique - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique
Nadia Oudjane: LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8 Vincennes-Saint-Denis - UP13 - Université Paris 13 - Institut Galilée - CNRS - Centre National de la Recherche Scientifique, EDF - EDF

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Abstract: We analyze the robustness properties of the Snell envelope backward evolution equation for the discrete time optimal stopping problem. We consider a series of approximation schemes, including cut-off type approximations, Euler discretization schemes, interpolation models, quantization tree models, and the Stochastic Mesh method of Broadie-Glasserman. In each situation, we provide non asymptotic convergence estimates, including Lp-mean error bounds and exponential concentration inequalities. We deduce these estimates from a single and general robustness property of Snell envelope semigroups. In particular, this analysis allows us to recover existing convergence results for the quantization tree method and to improve significantly the rates of convergence obtained for the Stochastic Mesh estimator of Broadie-Glasserman. In the second part of the article, we propose a new approach using a genealogical tree approximation of the reference Markov process in terms of a neutral type genetic model. In contrast to Broadie-Glasserman Monte Carlo models, the computational cost of this new stochastic particle approximation is linear in the number of sampled points. Some simulations results are provided and confirm the interest of this new algorithm.

Keywords: Snell envelope; optimal stopping; American option pricing; genealogical trees; interacting particle model (search for similar items in EconPapers)
Date: 2010-05-28
New Economics Papers: this item is included in nep-cmp and nep-ore
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Published in [Research Report] RR-7303, INRIA. 2010, pp.41

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