Dynamic programming for optimal stopping via pseudo-regression

DOI10.1080/14697688.2020.1780299zbMATH Open1479.91389arXiv1808.04725OpenAlexW2963915950MaRDI QIDQ5014168FDOQ5014168

Authors: Christian Bayer, Martin Redmann, John Schoenmakers 

Publication date: 1 December 2021

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: We introduce new variants of classical regression-based algorithms for optimal stopping problems based on computation of regression coefficients by Monte Carlo approximation of the corresponding $L^2$ inner products instead of the least-squares error functional. Coupled with new proposals for simulation of the underlying samples, we call the approach "pseudo regression". A detailed convergence analysis is provided and it is shown that the approach asymptotically leads to less computational cost for a pre-specified error tolerance, hence to lower complexity. The method is justified by numerical examples.

Full work available at URL: https://arxiv.org/abs/1808.04725

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zbMATH Keywords

linear regressionoption pricingMonte Carlo simulationbasket optionsBermudan options

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Dynamic programming (90C39) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (5)

• Multilevel simulation based policy iteration for optimal stopping -- convergence and complexity
• Optimal stopping via reinforced regression
• Primal-Dual Regression Approach for Markov Decision Processes with General State and Action Spaces
• On the optimization of pit stop strategies via dynamic programming
• Optimal stopping of McKean-Vlasov diffusions via regression on particle systems

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