Regression methods in pricing American and Bermudan options using consumption processes

Denis Belomestny, Grigori N. Milstein and Vladimir Spokoiny

No 2006-051, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Here we develop methods for efficient pricing multidimensional discrete time American and Bermudan options by using regression based algorithms together with a new approach towards constructing upper bounds for the price of the option. Applying 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 admits constructing both low and upper bounds for the price by Monte Carlo simulations. The methods are illustrated by pricing Bermudan swaptions and snowballs in the Libor market model.

Keywords: American and Bermudan options; Low and Upper bounds; Monte Carlo simulations; Consumption process; Regression methods; Optimal stopping times (search for similar items in EconPapers)
Date: 2006
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Journal Article: Regression methods in pricing American and Bermudan options using consumption processes (2009)
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