http://www.erasmusenergy.com en-us N/A dejong@kyos.com Tue, 06 Jan 2009 08:48:11 CET 20 http://www.erasmusenergy.com/articles/76/1/Regression-Methods-for-Pricing-Complex-American-Style-Options/Page1.html Published in:
Publication year: 2000
Co-author 1: Benjamin van Roy

We introduce and analyze a simulation-based, approximate dynamic programming method for pricing complex American-style options, with a possibly high-dimensional underlying state space. We work within a finitely parameterized family of approximate value functions, and introduce a variant of value iteration, adapted to this parametric setting. We also introduce a related method which uses a single (parameterized) value function, which is a function of the time-state pair, as opposed to using a separate (independently parameterized) value function for each time. Our methods involve the evaluation of value functions at a finite set, consisting of "representative" elements of the state space. We show that with an arbitrary choice of this set, the approximation error can grow exponentially with the time horizon (time to expiration). On the other hand, if representative states are chosen by simulating the state process using the underlying risk-neutral probability distribution, then the approximation error remains bounded.]]> no@spam.com (John Tsitsiklis) Thu, 11 Oct 2007 15:37:17 CEST http://www.erasmusenergy.com/articles/76/1/Regression-Methods-for-Pricing-Complex-American-Style-Options/Page1.html