Fast and accurate exercise policies for Bermudan swaptions in the LIBOR market model

Patrik Karlsson, Shashi Jain and Cornelis Oosterlee
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Patrik Karlsson: #x2020;Department of Economics, Lund University, P. O. Box 7082, S-220 07 Lund, Sweden‡ING, Amsterdam, The Netherlands
Shashi Jain: #x2021;ING, Amsterdam, The Netherlands

International Journal of Financial Engineering (IJFE), 2016, vol. 03, issue 01, 1-22

Abstract: This paper describes an American Monte Carlo approach for obtaining fast and accurate exercise policies for pricing of callable LIBOR Exotics (e.g., Bermudan swaptions) in the LIBOR market model using the Stochastic Grid Bundling Method (SGBM). SGBM is a bundling and regression based Monte Carlo method where the continuation value is projected onto a space where the distribution is known. We also demonstrate an algorithm to obtain accurate and tight lower–upper bound values without the need for nested Monte Carlo simulations.

Keywords: Applied mathematical finance; Bermudan swaptions; computational finance; derivative pricing models; interest rate modelling; LIBOR market model (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2424786316500055

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