This paper proposes a new method for pricing American options that uses importance sampling to reduce estimator bias and variance in simulation-and-regression based methods. Our suggested method uses regressions under the importance measure directly, instead of under the nominal measure as is...

We consider unobserved components time series models where the components are stochastically evolving over time and are subject to stochastic volatility. It enables the disentanglement of dynamic structures in both the mean and the variance of the observed time series. We develop a simulated...

Valuing American options is a central problem in option pricing since the early-exercise feature is very common among financial or insurance derivatives products. For high-dimensional American options, Monte Carlo simulation is generally regarded as the only viable approach to price them, and...

We propose and empirically study a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better...

This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi et al., we transform the constrained into an unconstrained optimal stopping problem. The transformation replaces the...

This paper describes a practical algorithm based on Monte Carlo simulation for the pricing of multidimensional American (i.e., continuously exercisable) and Bermudan (i.e., discretely exercisable) options. The method generates both lower and upper bounds for the Bermudan option price and hence...

Monte Carlo simulation has been used to value options since Boyle's seminal paper. Monte Carlo simulation, however, has not been used to its fullest extent for option valuation because of the belief that the method is not feasible for American-style options. This paper demonstrates how to...