Duality theory and simulation in financial engineering

Author

Haugh, Martin B.

Author_Institution

Dept. of IE & OR, Columbia Univ., New York, NY, USA

Volume

1

fYear

2003

fDate

7-10 Dec. 2003

Firstpage

327

Abstract

This paper presents a brief introduction to the use of duality theory and simulation in financial engineering. It focuses on American option pricing and portfolio optimization problems when the underlying state space is high-dimensional. In general, it is not possible to solve these problems exactly due to the so-called "curse of dimensionality" and as a result, approximate solution techniques are required. Approximate dynamic programming (ADP) and dual based methods have recently been proposed for constructing and evaluating good approximate solutions to these problems. In this paper we describe these ADP and dual-based methods, and the role simulation plays in each of them. Some directions for future research are also outlined.

Keywords

digital simulation; duality (mathematics); dynamic programming; financial data processing; pricing; American option pricing; approximate dynamic programming; approximate solution techniques; curse of dimensionality; dual based methods; duality theory; financial engineering simulation; high-dimensional state space; portfolio optimization problems; problem solving; role simulation; Helium; Marketing and sales; Markov processes; Optimization methods; Portfolios; Pricing; Random variables; Security; Stochastic processes; Upper bound;

fLanguage

English

Publisher

ieee

Conference_Titel

Simulation Conference, 2003. Proceedings of the 2003 Winter

Print_ISBN

0-7803-8131-9

Type

conf

DOI

10.1109/WSC.2003.1261440

Filename

1261440