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Valuing American Style Options by Least Squares Methods

Author

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  • Mario Cerrato

    (London Metropolitan University)

  • Kan Kwok Cheung

    (London Metropolitan University)

Abstract

We investigate the finite sample performance of some recent Monte Carlo estimators under different market scenarios. We find that the accuracy and efficiency of these estimators are remarkable, even when more exotic financial instruments are considered. Finally, we extend the Glasserman and Yu (2004b) methodology to price Asian Bermudan options and basket options

Suggested Citation

  • Mario Cerrato & Kan Kwok Cheung, 2007. "Valuing American Style Options by Least Squares Methods," Money Macro and Finance (MMF) Research Group Conference 2006 49, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc06:49
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    File URL: http://repec.org/mmf2006/up.32095.1144673533.pdf
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    References listed on IDEAS

    as
    1. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Abadir,Karim M. & Magnus,Jan R., 2005. "Matrix Algebra," Cambridge Books, Cambridge University Press, number 9780521537469, September.
    3. Rasmussen, Nicki Søndergaard, 2002. "Efficient Control Variates for Monte-Carlo Valuation of American Options," Finance Working Papers 02-17, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    4. Lars Stentoft, 2004. "Convergence of the Least Squares Monte Carlo Approach to American Option Valuation," Management Science, INFORMS, vol. 50(9), pages 1193-1203, September.
    5. repec:cup:cbooks:9780521822893 is not listed on IDEAS
    6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    7. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    8. Lars Stentoft, 2004. "Assessing the Least Squares Monte-Carlo Approach to American Option Valuation," Review of Derivatives Research, Springer, vol. 7(2), pages 129-168, August.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Lukito Adi Nugroho, 2017. "Real options valuation of franchise territorial exclusivity," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1262490-126, January.
    2. S. Alonso & V. Azofra & G. De La Fuente, 2014. "What do you do when the binomial cannot value real options? The LSM model," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-17, December.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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