Solving optimal stopping problems via empirical dual optimization
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Abstract: In this paper we consider a method of solving optimal stopping problems in discrete and continuous time based on their dual representation. A novel and generic simulation-based optimization algorithm not involving nested simulations is proposed and studied. The algorithm involves the optimization of a genuinely penalized dual objective functional over a class of adapted martingales. We prove the convergence of the proposed algorithm and demonstrate its efficiency for optimal stopping problems arising in option pricing.
This paper studies optimal stopping problems in discrete and continuous time. A simulation-based optimization algorithm is presented to solve the problems by the optimization of a genuinely penalized dual objective functional over a class of adapted martingales. A typical feature of the algorithm is that it does not involve nested simulation. Moreover, its convergence and efficiency are proved for problems appearing in option pricing. For example, the related variance can be made arbitrarily small by a proper choice of approximating martingales.
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Cited in
(24)- Efficient solutions for a class of optimal stopping problems
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- Optimal stopping via pathwise dual empirical maximisation
- Solving the bilateral group selection problem using optimal stopping options
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- Multilevel simulation based policy iteration for optimal stopping -- convergence and complexity
- Dual pricing of American options by Wiener chaos expansion
- Fast estimation of true bounds on Bermudan option prices under jump-diffusion processes
- Dynamic programming for optimal stopping via pseudo-regression
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- On the rates of convergence of simulation-based optimization algorithms for optimal stopping problems
- Purely dual approach for optimal stopping problems via regression
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