Leave-One-Out Least Square Monte Carlo Algorithm for Pricing American Options
Chenru Liu and
Papers from arXiv.org
The least square Monte Carlo (LSM) algorithm proposed by Longstaff and Schwartz  is widely used for pricing American options. The LSM estimator contains undesirable look-ahead bias, and the conventional technique of removing it necessitates doubling simulations. We present the leave-one-out LSM (LOOLSM) algorithm for efficiently eliminating look-ahead bias. We validate the method with several option examples, including the multi-asset cases that the LSM algorithm significantly overvalues. We also obtain the convergence rates of look-ahead bias by measuring it using the LOOLSM method. The analysis and computational evidence support our findings.
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Date: 2018-10, Revised 2019-05
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1810.02071
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