Approximating free exercise boundaries for American-style options using simulation and optimization
Monte Carlo simulation can be readily applied to asset pricing problems with multiple state variables and possible path dependencies because convergence of Monte Carlo methods is independent of the number of state variables. This paper applies Monte Carlo simulation to the problem of determining fre...
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| creator | Cobb, Barry R. Charnes, John M. |
| description | Monte Carlo simulation can be readily applied to asset pricing problems with multiple state variables and possible path dependencies because convergence of Monte Carlo methods is independent of the number of state variables. This paper applies Monte Carlo simulation to the problem of determining free exercise boundaries for pricing American-style options. We use a simulation-optimization method to identify approximately optimal exercise thresholds that are defined by a minimal number of parameters. We demonstrate that asset prices calculated using this method are comparable to those found using other numerical asset pricing methods. |
| doi_str_mv | 10.5555/1161734.1162038 |
| format | Conference Proceeding |
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| identifier | ISBN: 9780780387867 |
| ispartof | Proceedings of the 36th conference on Winter simulation, 2004, p.1637-1644 |
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| language | eng |
| recordid | cdi_acm_books_10_5555_1161734_1162038 |
| source | IEEE Electronic Library (IEL) Conference Proceedings |
| subjects | Applied computing Applied computing -- Enterprise computing Applied computing -- Enterprise computing -- Business process management Applied computing -- Law, social and behavioral sciences Applied computing -- Law, social and behavioral sciences -- Economics Applied sciences Computer science control theory systems Exact sciences and technology Mathematics of computing Mathematics of computing -- Probability and statistics Mathematics of computing -- Probability and statistics -- Probabilistic reasoning algorithms Mathematics of computing -- Probability and statistics -- Probabilistic reasoning algorithms -- Markov-chain Monte Carlo methods Simulation Software |
| title | Approximating free exercise boundaries for American-style options using simulation and optimization |
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