Valuing American Options by Simulation: A Simple Least-Squares Approach

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ID: 289933
2001
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Abstract
This article presents a simple yet powerful new approach for approximating the value of American options by simulation. The key to this approach is the use of least squares to estimate the conditional expected payoff to the optionholder from continuation. This makes this approach readily applicable in path-dependent and multifactor situations where traditional finite difference techniques cannot be used. We illustrate this technique with several realistic examples including valuing an option when the underlying asset follows a jump-diffusion process and valuing an American swaption in a 20-factor string model of the term structure.
Reference Key
openalex_W2126311658 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Francis A. Longstaff, Eduardo S. Schwartz
Journal review of financial studies
Year 2001
DOI
10.1093/rfs/14.1.113
URL
https://doi.org/10.1093/rfs/14.1.113
Keywords Keywords not found

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