On the stability the least squares Monte Carlo

DOI10.1007/S11590-011-0414-ZzbMATH Open1264.91140arXiv1102.3218OpenAlexW2110029167MaRDI QIDQ1940435FDOQ1940435

Authors: Oleksii Mostovyi 

Publication date: 7 March 2013

Published in: Optimization Letters (Search for Journal in Brave)

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.

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

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zbMATH Keywords

option pricingstabilityMonte Carlo methodsAmerican optionoptimal stoppingill-conditioningleast squares Monte Carlo

Mathematics Subject Classification ID

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

Cites Work

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• An analysis of a least squares regression method for American option pricing
• Valuing American options by simulation: a simple least-squares approach
• Assessing the least squares Monte-Carlo approach to American option valuation
• Number of paths versus number of basis functions in American option pricing
• On the robustness of least-squares Monte Carlo (LSM) for pricing American derivatives

Cited In (12)

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

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