Just-in-Time Monte Carlo for Path Dependent American Options
Posted: 1 Jun 2006
Date Written: May 29, 2006
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: Suggested Citation