Sequential Monte Carlo pricing of American-style options under stochastic volatility models

Statistics – Applications

Scientific paper

Rate now

  [ 0.00 ] – not rated yet Voters 0   Comments 0

Details

Published in at http://dx.doi.org/10.1214/09-AOAS286 the Annals of Applied Statistics (http://www.imstat.org/aoas/) by the Ins

Scientific paper

10.1214/09-AOAS286

We introduce a new method to price American-style options on underlying investments governed by stochastic volatility (SV) models. The method does not require the volatility process to be observed. Instead, it exploits the fact that the optimal decision functions in the corresponding dynamic programming problem can be expressed as functions of conditional distributions of volatility, given observed data. By constructing statistics summarizing information about these conditional distributions, one can obtain high quality approximate solutions. Although the required conditional distributions are in general intractable, they can be arbitrarily precisely approximated using sequential Monte Carlo schemes. The drawback, as with many Monte Carlo schemes, is potentially heavy computational demand. We present two variants of the algorithm, one closely related to the well-known least-squares Monte Carlo algorithm of Longstaff and Schwartz [The Review of Financial Studies 14 (2001) 113--147], and the other solving the same problem using a "brute force" gridding approach. We estimate an illustrative SV model using Markov chain Monte Carlo (MCMC) methods for three equities. We also demonstrate the use of our algorithm by estimating the posterior distribution of the market price of volatility risk for each of the three equities.

No associations

LandOfFree

Say what you really think

Search LandOfFree.com for scientists and scientific papers. Rate them and share your experience with other people.

Rating

Sequential Monte Carlo pricing of American-style options under stochastic volatility models does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Sequential Monte Carlo pricing of American-style options under stochastic volatility models, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Sequential Monte Carlo pricing of American-style options under stochastic volatility models will most certainly appreciate the feedback.

Rate now

     

Profile ID: LFWR-SCP-O-509174

  Search
All data on this website is collected from public sources. Our data reflects the most accurate information available at the time of publication.