Smart Monte Carlo, Path Integrals, and American Options
19 Pages Posted: 13 Jul 2016 Last revised: 17 Sep 2016
Date Written: September 11, 2016
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: Suggested Citation