On improving the least squares Monte Carlo option valuation method

• Type: Article in International Scientific Journal
• Date: 2008

Authors

Areal, N (Author) Other; Rodrigues, Artur (Author) FEP; Armada, MR (Author) Other

Journal

Title: Review of Derivatives Research

Vol. 11

Pages: 119-151

ISSN: 1380-6645

Publisher: Springer Nature

Indexing

ISI Web of Knowledge - 23 Citations

Scopus - 29 Citations

Other information

Authenticus ID: P-004-1CA

DOI: 10.1007/s11147-008-9026-x

Abstract (EN): This paper studies various possible approaches to improving the least squares Monte Carlo option valuation method. We test different regression algorithms and suggest a variation to estimating the option continuation value, which can reduce the execution time of the algorithm by one third. We test the choice of varying polynomial families with different number of basis functions. We compare several variance reduction techniques, and find that using low discrepancy sequences can improve the accuracy up to four times. We also extend our analysis to compound and mutually exclusive options. For the latter, we propose an improved algorithm which is faster and more accurate.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 33