Pricing Bermudan options: A nonparametric estimation approach
(English)Manuscript (preprint) (Other academic)
A nonparametric alternative to the Longstaff-Schwartz estimation of conditional expectations is suggested for pricing of Bermudan options. The method is based on regularization of a least-squares minimization, with a Tikhonov-type smoothing put on the partial differential equation which characterizes the underlying price processes. This approach can hence be viewed as a combination of the Monte Carlo method and the PDE method for the estimation of conditional expectations. The estimation method turns out to be robust with regard to the size of the smoothing parameter.
Optimal stopping, regularization, nonparametric estimation, conditional expectations, Bermudan options, Snell envelope.
Probability Theory and Statistics
IdentifiersURN: urn:nbn:se:kth:diva-42155OAI: oai:DiVA.org:kth-42155DiVA: diva2:445877
QS 20111052011-10-052011-10-052013-04-16Bibliographically approved