On the stability the least squares Monte Carlo

DOI10.1007/S11590-011-0414-ZMaRDI QIDQ1940435zbMATH OpenOpenAlexFDO

Authors Oleksii Mostovyi

Publication date 7 March 2013

Published in Optimization Letters (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1102.3218

zbMATH Keywords

American optionill-conditioningleast squares Monte CarloMonte Carlo methodsoptimal stoppingoption pricingstability

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: Consider Least Squares Monte Carlo (LSM) algorithm, which is proposed by Longstaff and Schwartz (2001) for pricing American style securities. This algorithm is based on the projection of the value of continuation onto a certain set of basis functions via the least squares problem. We analyze the stability of the algorithm when the number of exercise dates increases and prove that, if the underlying process for the stock price is continuous, then the regression problem is ill-conditioned for small values of the time parameter.

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Cites work

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Cited in

(12)

• On the robustness of two alternatives to least squares: A Monte Carlo study
• An improved least squares Monte Carlo valuation method based on heteroscedasticity
• Relationship between least squares Monte Carlo and approximate linear programming
• A least-squares Monte Carlo approach to the estimation of enterprise risk
• A computational weighted finite difference method for American and barrier options in subdiffusive Black-Scholes model
• The least squares method for option pricing revisited
• General error estimates for the Longstaff-Schwartz least-squares Monte Carlo algorithm
• On the optimality and stability of exponential twisting in Monte Carlo estimation
• Enhancing least squares Monte Carlo with diffusion bridges: an application to energy facilities
• Representations for conditional expectations and applications to pricing and hedging of financial products in Lévy and jump-diffusion setting
• Stability of sequential Monte Carlo samplers via the Foster-Lyapunov condition
• On variance stabilisation in population Monte Carlo by double Rao-Blackwellisation

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