Fast and Accurate Exercise Policies for Bermudan Swaptions in Libor Market Model

24 Pages Posted: 27 May 2015 Last revised: 1 Jun 2015

See all articles by Patrik Karlsson

Patrik Karlsson

drkarlsson.com

Shashi Jain

Indian Institute of Science (IISc) - Deptartment of Management Studies

Cornelis W. Oosterlee

Utrecht University - Faculty of Science

Date Written: April 25, 2013

Abstract

This paper describes an American Monte Carlo approach for obtaining fast and accurate exercise policies for pricing of callable LIBOR Exotics (e.g., Bermudan swaptions) in the LIBOR market model using the Stochastic Grid Bundling Method (SGBM). SGBM is a bundling and regression based Monte Carlo method where the continuation value is projected onto a space where the distribution is known. We also demonstrate an algorithm to obtain accurate and tight lower-upper bound values without the need for nested Monte Carlo simulations.

Keywords: Applied mathematical finance; Bermudan swaptions; Computational finance; Derivative pricing models; Interest rate modelling; LIBOR Market Model

JEL Classification: C63, C61, C15

Suggested Citation

Karlsson, Patrik and Jain, Shashi and Oosterlee, Cornelis W., Fast and Accurate Exercise Policies for Bermudan Swaptions in Libor Market Model (April 25, 2013). Available at SSRN: https://ssrn.com/abstract=2610849 or http://dx.doi.org/10.2139/ssrn.2610849

Patrik Karlsson (Contact Author)

drkarlsson.com ( email )

Sweden

Shashi Jain

Indian Institute of Science (IISc) - Deptartment of Management Studies ( email )

Indian Institute of Science
Bangalore
India

Cornelis W. Oosterlee

Utrecht University - Faculty of Science

Vredenburg 138
Utrecht, 3511 BG
Netherlands

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