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Dynamic programming for optimal stopping via pseudo-regression

Christian Bayer, Martin Redmann and John Schoenmakers

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Abstract: We introduce new variants of classical regression-based algorithms for optimal stopping problems based on computation of regression coefficients by Monte Carlo approximation of the corresponding $L^2$ inner products instead of the least-squares error functional. Coupled with new proposals for simulation of the underlying samples, we call the approach "pseudo regression". A detailed convergence analysis is provided and it is shown that the approach asymptotically leads to less computational cost for a pre-specified error tolerance, hence to lower complexity. The method is justified by numerical examples.

Date: 2018-08, Revised 2019-04
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