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Comparing optimal convergence rate of stochastic mesh and least squares method for Bermudan option pricing
We analyze the stochastic mesh method (SMM) as well as the least squares method (LSM) commonly
used for pricing Bermudan options using the standard two phase methodology. For both the methods, we
determine the decay rate of mean square error of the estimator as a function of the computational budget
allocated to the two phases and ascertain the order of the optimal allocation in these phases. We conclude
that with increasing computational budget, while SMM estimator converges at a slower rate compared to
LSM estimator, it converges to the true option value whereas LSM estimator, with fixed number of basis
functions, usually converges to a biased value
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