Using forward Monte-Carlo simulation for the valuation of American barrier options
Daniel Wei-Chung Miao (),
Yung-Hsin Lee and
Jr-Yan Wang
Additional contact information
Daniel Wei-Chung Miao: National Taiwan University of Science and Technology
Yung-Hsin Lee: Lunghwa University of Science and Technology
Jr-Yan Wang: National Taiwan University
Annals of Operations Research, 2018, vol. 264, issue 1, No 14, 339-366
Abstract:
Abstract This paper extends the forward Monte-Carlo methods, which have been developed for the basic types of American options, to the valuation of American barrier options. The main advantage of these methods is that they do not require backward induction, the most time-consuming and memory-intensive step in the simulation approach to American options pricing. For these methods to work, we need to define the so-called pseudo critical prices which are used to determine whether early exercise should happen. In this study, we define a new and more flexible version of the pseudo critical prices which can be conveniently extended to all fourteen types of American barrier options. These pseudo critical prices are shown to satisfy the criteria of a sufficient indicator which guarantees the effectiveness of the proposed methods. A series of numerical experiments are provided to compare the performance between the forward and backward Monte-Carlo methods and demonstrate the computational advantages of the forward methods.
Keywords: American barrier option; Forward Monte-Carlo method; Pseudo critical price; Sufficient indicator (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
http://link.springer.com/10.1007/s10479-017-2639-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:264:y:2018:i:1:d:10.1007_s10479-017-2639-4
Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479
DOI: 10.1007/s10479-017-2639-4
Access Statistics for this article
Annals of Operations Research is currently edited by Endre Boros
More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().