https://scholarbank.nus.edu.sg/handle/10635/160987
Title: | Assessing the least squares Monte-Carlo simulation in the stochastic volatility model | Authors: | WANG YAJUN | Keywords: | American Option, Least Squares Monte-Carlo, Stochastic Volatility, Variance Reduction, Multiple Underlying Assets | Issue Date: | 11-Mar-2005 | Citation: | WANG YAJUN (2005-03-11). Assessing the least squares Monte-Carlo simulation in the stochastic volatility model. ScholarBank@NUS Repository. | Abstract: | THE LEAST SQUARES MONTE-CARLO METHOD APPROXIMATES THE OPTION VALUE USING A LINEAR COMBINATION OF BASIS FUNCTIONS WITH BACKWARD INDUCTION TO ESTIMATE OPTIMAL COEFFICIENTS IN EACH APPROXIMATION. LONGSTAFF AND SCHWARTZ (2001) HAVE GIVEN A DETAILED ANALYSIS OF THE LSM APPROACH TO OPTION VALUATION. STENTOFT (2003) GIVES A CLOSER EXAMINATION OF THE PERFORMANCE OF THE ALGORITHM IN THE SIMPLE BLACK- SCHOLES CASE. IN THIS THESIS, WE TEST THE PERFORMANCE OF THE LSM METHOD IN PRICING AMERICAN-STYLE OPTIONS IN THE STOCHASTIC VOLATILITY MODEL. WE SHOW THAT, WHEN THE PRICES OF THE UNDERLYING ASSETS FOLLOW THE HESTON STOCHASTIC VOLATILITY MODEL, THE LSM METHOD CAN BE IMPLEMENTED WELL IN PRICING AMERICAN OPTIONS AND THE AMERICAN-BERMUDA-ASIAN OPTIONS ON ONE ASSET. HOWEVER, THE ESTIMATED RESULTS USING DIFFERENT NUMBER OF BASIS FUNCTIONS CHANGE SIGNIFICANTLY, WHEN WE USE THIS APPROACH TO PRICE THE MAXIMUM OPTIONS AND THE ARITHMETIC AVE |
URI: | https://scholarbank.nus.edu.sg/handle/10635/160987 |
Appears in Collections: | Master's Theses (Open) |
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