On the Robustness of Least-Squares Monte Carlo (LSM) for Pricing American Derivatives

Manuel Moreno and Javier Navas

Review of Derivatives Research, 2003, vol. 6, issue 2, 107-128

Abstract: This paper analyses the robustness of Least-Squares Monte Carlo, a technique proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least-squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on option prices. Numerical results for American put options show that this approach is quite robust to the choice of basis functions. For more complex derivatives, this choice can slightly affect option prices. Copyright Kluwer Academic Publishers 2003

Keywords: Least-Squares Monte Carlo; option pricing; American options (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/A:1027340210935

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