Mixing LSMC and PDE Methods to Price Bermudan Options

@article{Farahany2016MixingLA,
  title={Mixing LSMC and PDE Methods to Price Bermudan Options},
  author={David Farahany and Kenneth R. Jackson and Sebastian Jaimungal},
  journal={Derivatives eJournal},
  year={2016}
}
  • David Farahany, Kenneth R. Jackson, Sebastian Jaimungal
  • Published 2016
  • Mathematics, Economics
  • Derivatives eJournal
  • We develop a mixed least squares Monte Carlo-partial differential equation (LSMC-PDE) method for pricing Bermudan style options on assets under stochastic volatility. The algorithm is formulated for an arbitrary number of assets and volatility processes and we prove the algorithm converges almost surely for a class of models. We also introduce a multi-level Monte-Carlo/multi-grid method to improve the algorithm's computational complexity. Our numerical examples focus on the single (2d) and… CONTINUE READING

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