University of Twente Student Theses
Monte Carlo pricing of Bermudan-style derivatives with lower and upper bound methods
Jiang, Lai (2012) Monte Carlo pricing of Bermudan-style derivatives with lower and upper bound methods.
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Abstract: | The Longstaff-Schwartz algorithm is widely used for pricing Bermudan options. It allows Monte Carlo simulation to take into account the early-exercise feature of a Bermudan option. The method utilizes multi-linear regression to estimate the continuation value of such options. In this thesis, we study the impact of different regressor configurations on the performance of the Longstaff-Schwartz method. We evaluate pricing result in various model settings including the Black-Scholes world, the Heston model and the lognormal Libor market model. By using an upper bound pricing algorithm proposed by Andersen and Broadie, we demonstrate a reliable measure for evaluating the performance of the Longstaff-Schwartz algorithm. We show that regressor configuration plays a significant role in this method, and give recommendations on how to construct effective regressors. |
Item Type: | Essay (Master) |
Clients: | Rabobank |
Faculty: | EEMCS: Electrical Engineering, Mathematics and Computer Science |
Subject: | 31 mathematics |
Programme: | Applied Mathematics MSc (60348) |
Link to this item: | https://purl.utwente.nl/essays/62249 |
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