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Fast and accurate exercise policies for Bermudan swaptions in the LIBOR market model

Author

Listed:
  • Patrik Karlsson

    (#x2020;Department of Economics, Lund University, P. O. Box 7082, S-220 07 Lund, Sweden‡ING, Amsterdam, The Netherlands)

  • Shashi Jain

    (#x2021;ING, Amsterdam, The Netherlands)

  • Cornelis W. Oosterlee

    (CWI-Centrum Wiskunde & Informatica, Amsterdam, The Netherlands§TU Delft, Delft Institute of Applied Mathematics, Delft, The Netherlands)

Abstract

This paper describes an American Monte Carlo approach for obtaining fast and accurate exercise policies for pricing of callable LIBOR Exotics (e.g., Bermudan swaptions) in the LIBOR market model using the Stochastic Grid Bundling Method (SGBM). SGBM is a bundling and regression based Monte Carlo method where the continuation value is projected onto a space where the distribution is known. We also demonstrate an algorithm to obtain accurate and tight lower–upper bound values without the need for nested Monte Carlo simulations.

Suggested Citation

  • Patrik Karlsson & Shashi Jain & Cornelis W. Oosterlee, 2016. "Fast and accurate exercise policies for Bermudan swaptions in the LIBOR market model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-22, March.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:01:n:s2424786316500055
    DOI: 10.1142/S2424786316500055
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    References listed on IDEAS

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    Cited by:

    1. Griselda Deelstra & Lech A. Grzelak & Felix L. Wolf, 2022. "Accelerated Computations of Sensitivities for xVA," Papers 2211.17026, arXiv.org, revised Jan 2024.

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