Distributed Least-Squares Monte Carlo for American Option Pricing

Lu Xiong (), Jiyao Luo, Hanna Vise and Madison White
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Lu Xiong: Department of Mathematical Sciences, College of Basic and Applied Sciences, Middle Tennessee State University, Murfreesboro, TN 37132, USA
Jiyao Luo: Department of Mathematical Sciences, College of Basic and Applied Sciences, Middle Tennessee State University, Murfreesboro, TN 37132, USA
Hanna Vise: Department of Mathematical Sciences, College of Basic and Applied Sciences, Middle Tennessee State University, Murfreesboro, TN 37132, USA
Madison White: Department of Mathematical Sciences, College of Basic and Applied Sciences, Middle Tennessee State University, Murfreesboro, TN 37132, USA

Risks, 2023, vol. 11, issue 8, 1-16

Abstract: Option pricing is an important research field in financial markets, and the American option is a common financial derivative. Fast and accurate pricing solutions are critical to the stability and development of the market. Computational techniques, especially the least squares Monte Carlo (LSMC) method, have been broadly used in optimizing the pricing algorithm. This paper discusses the application of distributed computing technology to enhance the LSMC in American option pricing. Although parallel computing has been used to improve the LSMC method, this paper is the first to explore distributed computing technology for LSMC enhancement. Compared with parallel computing, distributed computing has several advantages, including reducing the computational complexity by the “divide and conquer” method, avoiding the complicated matrix transformation, and improving data privacy as well as security. Moreover, LSMC is suitable for distributed computing because the price paths can be simulated and regressed separately. This research aims to show how distributed computing, particularly the divide and conquer approach implemented by Apache Spark, can be used to improve the efficiency and accuracy of LSMC in American option pricing. This paper provides an innovative solution to the financial market and could contribute to the advancement of American option pricing research.

Keywords: American option pricing; least squares Monte Carlo (LSMC); distributed computing; computational complexity; MapReduce; Apache Spark (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
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