Iterative construction of the optimal Bermudan stopping time
- Kolodko, Anastasia
- Schoenmakers, John G. M.
2010 Mathematics Subject Classification
- 62L15 65C05 91B228
- Bermudan options, optimal stopping, Monte Carlo simulation, LIBOR market model
We present an iterative procedure for computing the optimal Bermudan stopping time. We prove convergence and, as a consequence, the method allows for approximation of the Snell envelope from below. By using duality, we then deduce a convergent procedure for approximating the Snell envelope from above as well. We provide numerical examples for Bermudan swaptions in the context of a LIBOR market model.
- Finance and Stochastics, Volume 10, Number 1 (Jan. 2006), pp. 27 - 49