Iterative construction of the optimal Bermudan stopping time

Anastasia Kolodko () and John Schoenmakers ()

Finance and Stochastics, 2006, vol. 10, issue 1, 27-49

Abstract: We present an iterative procedure for computing the optimal Bermudan stopping time, hence the Bermudan Snell envelope. The method produces an increasing sequence of approximations of the Snell envelope from below, which coincide with the Snell envelope after finitely many steps. Then, by duality, the method induces a convergent sequence of upper bounds as well. In a Markovian setting the presented procedure allows to calculate approximative solutions with only a few nestings of conditional expectations and is therefore tailor-made for a plain Monte Carlo implementation. The method may be considered generic for all discrete optimal stopping problems. The power of the procedure is demonstrated for Bermudan swaptions in a full factor LIBOR market model. Copyright Springer-Verlag Berlin/Heidelberg 2006

Keywords: Bermudan options; optimal stopping; Monte Carlo simulation; LIBOR market model (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (25)

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DOI: 10.1007/s00780-005-0168-5

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