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On improving the least squares Monte Carlo option valuation method

  • Nelson Areal
  • Artur Rodrigues
  • Manuel R. Armada
Article

Abstract

This paper studies various possible approaches to improving the least squares Monte Carlo option valuation method. We test different regression algorithms and suggest a variation to estimating the option continuation value, which can reduce the execution time of the algorithm by one third. We test the choice of varying polynomial families with different number of basis functions. We compare several variance reduction techniques, and find that using low discrepancy sequences can improve the accuracy up to four times. We also extend our analysis to compound and mutually exclusive options. For the latter, we propose an improved algorithm which is faster and more accurate.

Keywords

American options Real options Simulation Quasi Monte Carlo methods 

JEL Classifications

D81 G13 G31 

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Nelson Areal
    • 1
  • Artur Rodrigues
    • 1
  • Manuel R. Armada
    • 1
  1. 1.NEGE, School of Economics and ManagementUniversity of MinhoBragaPortugal

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