MONTE CARLO EVALUATION OF AMERICAN OPTIONS USING CONSUMPTION PROCESSES

Denis Belomestny () and Grigori N. Milstein ()
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Denis Belomestny: Weierstrass Institute for Applied Analysis and Stochastics, Mohrenstr.39, D-10117 Berlin, Germany
Grigori N. Milstein: Department of Mathematics, Ural State University, Lenin Str. 51, 620083 Ekaterinburg, Russia

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 04, 455-481

Abstract: We develop a new approach for pricing both continuous-time and discrete-time American options which is based on the fact that any American option is equivalent to a European one with a consumption process involved. This approach admits the construction of an upper bound (a lower bound) on the true price using some lower bound (an upper bound) by Monte Carlo simulation. A number of effective estimators of upper and lower bounds with the reduced variance are proposed. The method is supported by numerical experiments which look promising.

Keywords: American and Bermudan options; lower and upper bounds; Monte Carlo simulation; variance reduction (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024906003652

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