Analyzing the Bias in the Primal-Dual Upper Bound Method for Early Exercisable Derivatives: Bounds, Estimation and Removal
25 Pages Posted: 27 Mar 2014 Last revised: 15 Jun 2015
Date Written: June 15, 2015
We analyze the primal-dual upper bound method and prove that its bias is inversely proportional to the number of paths in sub-simulations for a large class of cases. We develop a methodology for estimating and reducing the bias. We present numerical results showing that the new technique is indeed effective.
Keywords: Bermudan option, upper bounds, Monte Carlo simulation
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