Paper #543

Títol:

On the robustness of least-squares Monte Carlo (LSM) for pricing American derivatives

Autors:

Manuel Moreno i Javier R. Navas

Data:

Abril 2001

Resum:

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.

Paraules clau:

Least-Squares Monte Carlo, option pricing, American options

Codis JEL:

C15, C60, G13

Àrea de Recerca:

Finances i Comptabilitat

Publicat a:

Review of Derivatives Research, 6 (2003), 2 (May), pp. 107-128

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