On the Robustness of Least - Squares Monte Carlo (LSM) for Pricing American Derivatives

Moreno Fuentes, Manuel; Navas, Javier

Abstract

References (45)

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On the Robustness of Least - Squares Monte Carlo (LSM) for Pricing American Derivatives

Pablo de Olavide University

Review of Derivatives Research, Vol. 6, No. 2, 2003

Abstract:
This paper analyses the robustness of Least - Squares Monte Carlo, a technique proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least - squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on option prices. Numerical results for American put options show that this approach is quite robust to the choice of basis functions. For more complex derivatives, this choice can slightly affect option prices.

Number of Pages in PDF File: 41

Keywords: Least-Squares Monte Carlo, Option Pricing, American Options

JEL Classification: C15, C60, G13

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Date posted: November 20, 2007 ; Last revised: December 7, 2007

Suggested Citation

Moreno, Manuel and Navas, Javier F., On the Robustness of Least - Squares Monte Carlo (LSM) for Pricing American Derivatives. Review of Derivatives Research, Vol. 6, No. 2, 2003. Available at SSRN: http://ssrn.com/abstract=1031331

Contact Information

Manuel Moreno Fuentes University of Castilla-La Mancha ( email ) Cobertizo San Pedro Martir s/n Toledo, Toledo 45071 Spain
Javier F. Navas (Contact Author) Pablo de Olavide University ( email ) Ctra. de Utrera, Km.1 41013 Seville Spain

Abstract

References (45)

On the Robustness of Least - Squares Monte Carlo (LSM) for Pricing American Derivatives

Manuel Moreno

Javier F. Navas

Date posted: November 20, 2007 ; Last revised: December 7, 2007

Suggested Citation

Contact Information

Manuel Moreno Fuentes

Javier F. Navas (Contact Author)