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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:http://purl.utwente.nl/essays/62249
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