WIAS Preprint No. 1247, (2007)

Sensitivities for Bermudan options by regression methods



Authors

  • Belomestny, Denis
  • Milstein, Grigori N.
  • Schoenmakers, John G. M.

2010 Mathematics Subject Classification

  • 60H30 65C05 91B28

Keywords

  • Monte Carlo simulation, regression method, conditional probabilistic representations, optimal stopping times, American and Bermudan options, deltas

Abstract

In this article we propose several pathwise and finite difference based methods for calculating sensitivities of Bermudan options using regression methods and Monte Carlo simulation. These methods rely on conditional probabilistic representations which allows, in combination with a regression approach, an efficient simultaneous computation of sensitivities at all initial positions. Assuming that the price of a Bermudan option can be evaluated sufficiently accurate, we develop a method for constructing deltas based on least squares. We finally propose a testing procedure for assessing the performance of the developed methods.

Appeared in

  • Decis. Econ. Finance, 33 (2010) pp. 117--138.

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