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A state-space partitioning method for pricing high-dimensional American-style options
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Jin, Xing, Tan, Hwee Huat and Sun, Junhua (2007) A state-space partitioning method for pricing high-dimensional American-style options. Mathematical Finance, Vol.17 (No.3). pp. 399-426. doi:10.1111/j.1467-9965.2007.00309.x ISSN 0960-1627.
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Official URL: http://dx.doi.org/10.1111/j.1467-9965.2007.00309.x
Abstract
The pricing of American-style options by simulation-based methods is an important but difficult task primarily due to the feature of early exercise, particularly for high-dimensional derivatives. In this paper, a bundling method based on quasi-Monte Carlo sequences is proposed to price high-dimensional American-style options. The proposed method substantially extends Tilley's bundling algorithm to higher-dimensional situations. By using low-discrepancy points, this approach partitions the state space and forms bundles. A dynamic programming algorithm is then applied to the bundles to estimate the continuation value of an American-style option. A convergence proof of the algorithm is provided. A variety of examples with up to 15 dimensions are investigated numerically and the algorithm is able to produce computationally efficient results with good accuracy.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions Q Science > QA Mathematics H Social Sciences |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group | ||||
Journal or Publication Title: | Mathematical Finance | ||||
Publisher: | Wiley-Blackwell Publishing, Inc. | ||||
ISSN: | 0960-1627 | ||||
Official Date: | July 2007 | ||||
Dates: |
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Volume: | Vol.17 | ||||
Number: | No.3 | ||||
Number of Pages: | 28 | ||||
Page Range: | pp. 399-426 | ||||
DOI: | 10.1111/j.1467-9965.2007.00309.x | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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