Just-in-Time Monte Carlo for Path Dependent American Options

Posted: 1 Jun 2006

See all articles by Samir K. Dutt

Samir K. Dutt

Orfalea College of Business; Quantal International Inc.

Gerd Welke

Baruch College - Zicklin School Business - Real Estate Department

Date Written: May 29, 2006

Abstract

We establish simple analytical and numerical methods for propagating stochastic price processes backwards in time, step by step, to the initial value while satisfying all cross-sectional and serial requirements. This proves useful in dealing with complex path-dependent options with American triggers, where storing the history of the underlying can become computationally onerous. Examples involving the Wiener, Ornstein-Uhlenbeck, Clark, and Cox-Ingersoll-Ross processes illustrate our techniques. Our "just-in-time" method, which can be thought of as stochastic involution, extends the reach and accuracy of Monte Carlo pricing techniques beyond what has hitherto been possible.

Keywords: American options, least squares Monte Carlo, stochastic involution

JEL Classification: C15, G12, G13

Suggested Citation

Dutt, Samir K. and Welke, Gerd, Just-in-Time Monte Carlo for Path Dependent American Options (May 29, 2006). Available at SSRN: https://ssrn.com/abstract=905567

Samir K. Dutt

Orfalea College of Business ( email )

San Luis Obispo, CA 93407
United States
805-756-2944 (Phone)

Quantal International Inc. ( email )

1936 University Avenue
Berkeley, CA 94704
510 848-0470 (Phone)

Gerd Welke (Contact Author)

Baruch College - Zicklin School Business - Real Estate Department ( email )

United States

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