Pricing American-style securities using simulation

Pricing American-style securities using simulation We develop a simulation algorithm for estimating the prices of American-style securities, i.e., securities with opportunities for early exercise. Our algorithm provides both point estimates and error bounds for the true security price. It generates two estimates, one biased high and one biased low, both asymptotically unbiased and converging to the true price. Combining the two estimators yields a confidence interval for the true price. The proposed algorithm is especially attractive (compared with lattice and finite-difference methods) when there are multiple state variables and a small number of exercise opportunities. Preliminary computational evidence is given. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Dynamics and Control Elsevier

Pricing American-style securities using simulation

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Publisher
Elsevier
Copyright
Copyright © 1997 Elsevier Ltd
ISSN
0165-1889
eISSN
1879-1743
DOI
10.1016/S0165-1889(97)00029-8
Publisher site
See Article on Publisher Site

Abstract

We develop a simulation algorithm for estimating the prices of American-style securities, i.e., securities with opportunities for early exercise. Our algorithm provides both point estimates and error bounds for the true security price. It generates two estimates, one biased high and one biased low, both asymptotically unbiased and converging to the true price. Combining the two estimators yields a confidence interval for the true price. The proposed algorithm is especially attractive (compared with lattice and finite-difference methods) when there are multiple state variables and a small number of exercise opportunities. Preliminary computational evidence is given.

Journal

Journal of Economic Dynamics and ControlElsevier

Published: Jun 29, 1997

References

  • Convergence of American option values from discrete- to continuous-time financial models
    Amin, K.I.; Khanna, A.
  • Monte Carlo methods for security pricing
    Boyle, P.P.; Broadie, M.; Glasserman, P.
  • An option-theoretic approach to the valuation of dividend reinvestment and voluntary purchase plans
    Dammon, R.M.; Spatt, C.S.
  • The American put options valued analytically
    Geske, R.; Johnson, H.E.
  • Simulation modeling and analysis
    Law, A.M.; Kelton, W.D.
  • Valuing flexibility as a complex option
    Triantis, A.J.; Hodder, J.E.

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