Article ID: | iaor2009779 |
Country: | United Kingdom |
Volume: | 8 |
Issue: | 2 |
Start Page Number: | 135 |
End Page Number: | 146 |
Publication Date: | Mar 2008 |
Journal: | Quantitative Finance |
Authors: | Bender Christian, Kolodko Anastasia, Schoenmakers John |
Keywords: | simulation |
Kolodko & Schoenmakers and Bender & Schoenmakers introduced a policy iteration that allows the achievement of a tight lower approximation of the price for early exercise options via a nested Monte Carlo simulation in a Markovian setting. In this paper we enhance the algorithm by a scenario selection method. It is demonstrated by numerical examples that the scenario selection can significantly reduce the number of inner simulations actually performed, and thus can greatly speed up the method (by up to a factor of 15 in some examples).