Regression methods in pricing American and Bermudan options using consumption processes

Denis Belomestny, Grigori Milstein and Vladimir Spokoiny

Quantitative Finance, 2009, vol. 9, issue 3, 315-327

Abstract: Numerical algorithms for the efficient pricing of multidimensional discrete-time American and Bermudan options are constructed using regression methods and a new approach for computing upper bounds of the options' price. Using the sample space with payoffs at optimal stopping times, we propose sequential estimates for continuation values, values of the consumption process, and stopping times on the sample paths. The approach allows the constructing of both lower and upper bounds for the price by Monte Carlo simulations. The algorithms are tested by pricing Bermudan max-calls and swaptions in the Libor market model.

Keywords: American and Bermudan options; Error bounds; Monte Carlo; Consumption process; Regression methods; Optimal stopping times (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/14697680802165736

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