Valuing American Derivatives by Least Squares Methods

Mario Cerrato

No 2008-44, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: Least Squares estimators are notoriously known to generate sub-optimal exercise decisions when determining the optimal stopping time. The consequence is that the price of the option is underestimated. We show how variance reduction methods can be implemented to obtain more accurate option prices. We also extend the Longsta¤ and Schwartz (2001) method to price American options under stochastic volatility. These are two important contributions that are particularly relevant for practitioners. Finally, we extend the Glasserman and Yu (2004b) methodology to price Asian options and basket options.

Keywords: American options; Monte Carlo method (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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