Title :
Applying Model Reference Adaptive Search to American-Style Option Pricing
Author :
Zhang, Huiju ; Fu, Michael C.
Author_Institution :
R. H. Smith Sch. of Bus., Maryland Univ., College Park, MD
Abstract :
This paper considers the application of stochastic optimization methods to American-style option pricing. We apply a randomized optimization algorithm called model reference adaptive search (MRAS) to pricing American-style options by parameterizing the early exercise boundary. Numerical results are provided for pricing American-style call and put options written on underlying assets following geometric Brownian motion and Merton jump-diffusion processes. The results from the MRAS algorithm are also compared with the cross-entropy (CE) method
Keywords :
Brownian motion; adaptive systems; financial data processing; search problems; stochastic processes; American-style option pricing; cross-entropy method; geometric Brownian motion; jump-diffusion processes; model reference adaptive search; stochastic optimization; Analytical models; Computational modeling; Cost accounting; Dynamic programming; Educational institutions; Iterative algorithms; Optimization methods; Piecewise linear approximation; Pricing; Stochastic processes;
Conference_Titel :
Simulation Conference, 2006. WSC 06. Proceedings of the Winter
Conference_Location :
Monterey, CA
Print_ISBN :
1-4244-0500-9
Electronic_ISBN :
1-4244-0501-7
DOI :
10.1109/WSC.2006.323150
