Regression methods in pricing American and Bermudan options using consumption processes

Denis Belomestny, Grigori Milstein, Vladimir Spokoiny

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)

Abstract

Numerical algorithms for the efficient pricing of multidimensional discrete-time American and Bermudan options are constructed using regression methods and a new approach for computing upper bounds of the options' price. Using the sample space with payoffs at optimal stopping times, we propose sequential estimates for continuation values, values of the consumption process, and stopping times on the sample paths. The approach allows the constructing of both lower and upper bounds for the price by Monte Carlo simulations. The algorithms are tested by pricing Bermudan max-calls and swaptions in the Libor market model.

Original languageEnglish
Pages (from-to)315-327
Number of pages13
JournalQuantitative Finance
Volume9
Issue number3
DOIs
Publication statusPublished - Apr 2009
Externally publishedYes

Keywords

  • American and Bermudan options
  • Consumption process
  • Error bounds
  • Monte Carlo
  • Optimal stopping times
  • Regression methods

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