Examining the Efficiency of American Put Option Pricing by Monte Carlo Methods with Variance Reduction
International Journal of Economics and Finance, 2018, vol. 10, issue 2, 10-13
We apply the Monte Carlo simulation algorithm developed by Broadie and Glasserman (1997) and the control variate technique first introduced to asset pricing via simulation by Boyle (1977) to examine the efficiency of American put option pricing via this combined method. The importance and effectiveness of variance reduction is clearly demonstrated in our simulation results. We also found that the control variates technique does not work as well for deep-in-the-money American put options. This is because deep-in-the-money American options are more likely to be exercised early, thus the value of the American options are less in line (or less correlated) with those of their European counterparts.
Keywords: option pricing; american put option; monte carlo simulation; variance reduction (search for similar items in EconPapers)
JEL-codes: R00 Z0 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ibn:ijefaa:v:10:y:2018:i:2:p:10-13
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