Effective sub-simulation-free upper bounds for the Monte Carlo pricing of callable derivatives and various improvements to existing methodologies

Mark Joshi and Robert Tang

Journal of Economic Dynamics and Control, 2014, vol. 40, issue C, 25-45

Abstract: We present a new non-nested approach for computing additive upper bounds for callable derivatives using Monte Carlo simulation. It relies on the regression of Greeks computed using adjoint methods. We also show that it is possible to early terminate paths once points of optimal exercise have been reached. A natural control variate for the multiplicative upper bound is introduced which renders it competitive to the additive one. In addition, a new bi-iterative family of upper bounds is introduced which takes a stopping time, an upper bound, and a martingale as inputs.

Keywords: G10; G12; G13; LIBOR market model; Bermudan options; Callability; Monte Carlo; Early exercise; Upper bounds (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:40:y:2014:i:c:p:25-45

DOI: 10.1016/j.jedc.2013.12.001

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