TY - JOUR
T1 - Pricing Bermudan options under Merton jump-diffusion asset dynamics
AU - Cong, F.
AU - Oosterlee, C.W.
PY - 2015
Y1 - 2015
N2 - In this paper, a recently developed regression-based option pricing method, the Stochastic Grid Bundling Method (SGBM), is considered for pricing multidimensional Bermudan options. We compare SGBM with a traditional regression-based pricing approach and present detailed insight in the application of SGBM, including how to configure it and how to reduce the uncertainty of its estimates by control variates. We consider the Merton jump-diffusion model, which performs better than the geometric Brownian motion in modelling the heavy-tailed features of asset price distributions. Our numerical tests show that SGBM with appropriate set-up works highly satisfactorily for pricing multidimensional options under jump-diffusion asset dynamics.
AB - In this paper, a recently developed regression-based option pricing method, the Stochastic Grid Bundling Method (SGBM), is considered for pricing multidimensional Bermudan options. We compare SGBM with a traditional regression-based pricing approach and present detailed insight in the application of SGBM, including how to configure it and how to reduce the uncertainty of its estimates by control variates. We consider the Merton jump-diffusion model, which performs better than the geometric Brownian motion in modelling the heavy-tailed features of asset price distributions. Our numerical tests show that SGBM with appropriate set-up works highly satisfactorily for pricing multidimensional options under jump-diffusion asset dynamics.
UR - http://www.scopus.com/inward/record.url?eid=2-s2.0-84945467520&partnerID=MN8TOARS
U2 - 10.1080/00207160.2015.1070838
DO - 10.1080/00207160.2015.1070838
M3 - Article
SN - 0020-7160
VL - 92
SP - 2406
EP - 2432
JO - International Journal of Computer Mathematics
JF - International Journal of Computer Mathematics
IS - 12
ER -