Paper #543

Título:

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

Autores:

Manuel Moreno y Javier R. Navas

Data:

Abril 2001

Resumen:

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.

Palabras clave:

Least-Squares Monte Carlo, option pricing, American options

Códigos JEL:

C15, C60, G13

Área de investigación:

Finanzas y Contabilidad

Publicado en:

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

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