Review of Derivatives Research

, Volume 6, Issue 2, pp 107–128

On the Robustness of Least-Squares Monte Carlo (LSM) for Pricing American Derivatives

  • Manuel Moreno
  • Javier F. Navas

DOI: 10.1023/A:1027340210935

Cite this article as:
Moreno, M. & Navas, J.F. Review of Derivatives Research (2003) 6: 107. doi:10.1023/A:1027340210935


This paper analyses the robustness of Least-Squares Monte Carlo, a technique proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least-squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on option prices. Numerical results for American put options show that this approach is quite robust to the choice of basis functions. For more complex derivatives, this choice can slightly affect option prices.

Least-Squares Monte Carlooption pricingAmerican options

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Manuel Moreno
    • 1
  • Javier F. Navas
    • 2
  1. 1.Department of Economics and BusinessUniversitat Pompeu FabraBarcelonaSpain
  2. 2.Department of FinanceInstituto de EmpresaMadridSpain