On the rates of convergence of simulation-based optimization algorithms for optimal stopping problems

DOI10.1214/10-AAP692zbMATH Open1234.60043arXiv0909.3570MaRDI QIDQ627243FDOQ627243

Authors: D. Belomestny 

Publication date: 21 February 2011

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: In this paper we study simulation based optimization algorithms for solving discrete time optimal stopping problems. This type of algorithms became popular among practioneers working in the area of quantitative finance. Using large deviation theory for the increments of empirical processes, we derive optimal convergence rates and show that they can not be improved in general. The rates derived provide a guide to the choice of the number of simulated paths needed in optimization step, which is crucial for the good performance of any simulation based optimization algorithm. Finally, we present a numerical example of solving optimal stopping problem arising in option pricing that illustrates our theoretical findings.

Full work available at URL: https://arxiv.org/abs/0909.3570

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zbMATH Keywords

empirical processesoptimal stoppingexponential inequalities\(\delta \)-entropy with bracketingsimulation-based algorithms

Mathematics Subject Classification ID

Discrete-time Markov processes on general state spaces (60J05) Stopping times; optimal stopping problems; gambling theory (60G40) Financial applications of other theories (91G80)

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Cited In (9)

• Deep neural network expressivity for optimal stopping problems
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• Solving optimal stopping problems via empirical dual optimization
• Randomized Optimal Stopping Algorithms and Their Convergence Analysis
• Pricing American options by exercise rate optimization
• Solving high-dimensional optimal stopping problems using deep learning
• Deep optimal stopping
• A deep learning method for pricing high-dimensional American-style options via state-space partition
• On the consistency of regression-based Monte Carlo methods for pricing Bermudan options in case of estimated financial models

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