Smart Monte Carlo, Path Integrals, and American Options

19 Pages Posted: 13 Jul 2016 Last revised: 17 Sep 2016

Date Written: September 11, 2016

Abstract

In two previous papers we introduced Smart Monte Carlo SMC, more accurate and faster than traditional MC. Here we apply SMC to American Monte Carlo AMC. The main tool is the Feynman-Wiener path integral with a useful binning procedure. We also suggest Prony interpolating functions with regression advantages. We present American put option results. We obtain a smaller price error and a smoother optimal exercise boundary than with standard methods. We comment on multidimensional SMC.

Keywords: Smart Monte Carlo, SMC, accuracy, speed, American MC, AMC, Feynman, path integral, binning procedure, Prony, interpolating functions, smaller price error, smoother optimal exercise boundary, multidimensional SMC

JEL Classification: C14, C63, C65, G1

Suggested Citation

Dash, Jan and Yang, Xipei, Smart Monte Carlo, Path Integrals, and American Options (September 11, 2016). Available at SSRN: https://ssrn.com/abstract=2808186 or http://dx.doi.org/10.2139/ssrn.2808186

Jan Dash (Contact Author)

Bloomberg LP ( email )

731 Lexington Ave
New York, NY 10022
United States

Xipei Yang

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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