Using least-square Monte Carlo simulation to price American multi underlying stock options

Palupi, Irma; Sitorus, Indra Utama; Umbara, Rian Febrian

doi:10.1109/icoict.2015.7231476

Cited by 4 publications

(2 citation statements)

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“…Least-squares method is a way to resolve the regression analysis. For the basic idea, the least-squares method is applied to estimate α parameters at model Y = αX + ε [9], which give minimum the sum of squared errors as.…”

Section: Least Square Monte Carlo Simulation (Lsm)mentioning

confidence: 99%

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Comparison of Least Square Monte Carlo Algorithm and Binomial Tree Model for Pricing American Options

Meng¹

2023

Advances in Economics, Business and Management Research

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The financial market is a rapidly growing industry where derivatives are popular among investors. The rapid growth of options trading leads to the development of various option pricing theories and models. Through them, Longstaff and Schwartz improved the Monte Carlo model in 2001. The improved least square Monte Carlo simulation (LSM) is widely used in pricing American options. This paper aims to compare two estimation methods in pricing American options, namely the Least Square Monte Carlo Algorithm and the Binomial Tree Model, and detect which model better estimates the accuracy of the operation. In a refinement of using the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to measure the volatility, an empirical comparison of the models using the Copper future contract is conducted. It is found that the binomial tree method can more accurately predict the American options prediction problem, and applying it to the pricing of copper can not only improve the market but also provide a more reasonable and rapid pricing basis for its subsequent development.

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Section: Least Square Monte Carlo Simulation (Lsm)mentioning

confidence: 99%

“…LSM will find the optimal stock price for the American option to execute the options , which is to consider the intersection between the line function and the payoff function [9]. The idea is as follows:…”

Section: Least Square Monte Carlo Simulation (Lsm)mentioning

confidence: 99%