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Title:
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On the Robustness of Least-Squares Monte Carlo (LSM) for Pricing American Derivatives
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Author:
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Moreno, Manuel; Navas, Javier F.
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Other authors:
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Universitat Pompeu Fabra. Departament d'Economia i Empresa |
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Abstract:
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This paper analyses the robustness of Least-Squares Monte Carlo, a technique recently proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least-squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on option prices. Numerical results for American put options provide evidence that a) this approach is very robust to the choice of different alternative polynomials and b) few basis functions are required. However, these conclusions are not reached when analyzing more complex derivatives. |
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Publication date:
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2005-09-15 |
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Subject(s):
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Least-Squares Monte Carlo, option pricing, American options |
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Rights:
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Aquest document està subjecte a una llicència d'ús de Creative Commons, amb la qual es permet copiar, distribuir i comunicar públicament l'obra sempre que se'n citin l'autor original, la universitat i el departament i no se'n faci cap ús comercial ni obra derivada, tal com queda estipulat en la llicència d'ús (http://creativecommons.org/licenses/by-nc-nd/2.5/es/) |
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Document type:
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Working Paper |
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