American Monte Carlo option pricing under pure jump levy models

West, Lydia (2013-03)

Thesis (MSc)--Stellenbosch University, 2013.

Thesis

ENGLISH ABSTRACT: We study Monte Carlo methods for pricing American options where the stock price dynamics follow exponential pure jump L évy models. Only stock price dynamics for a single underlying are considered. The thesis begins with a general introduction to American Monte Carlo methods. We then consider two classes of these methods. The fi rst class involves regression - we briefly consider the regression method of Tsitsiklis and Van Roy [2001] and analyse in detail the least squares Monte Carlo method of Longsta and Schwartz [2001]. The variance reduction techniques of Rasmussen [2005] applicable to the least squares Monte Carlo method, are also considered. The stochastic mesh method of Broadie and Glasserman [2004] falls into the second class we study. Furthermore, we consider the dual method, independently studied by Andersen and Broadie [2004], Rogers [2002] and Haugh and Kogan [March 2004] which generates a high bias estimate from a stopping rule. The rules we consider are estimates of the boundary between the continuation and exercise regions of the option. We analyse in detail how to obtain such an estimate in the least squares Monte Carlo and stochastic mesh methods. These models are implemented using both a pseudo-random number generator, and the preferred choice of a quasi-random number generator with bridge sampling. As a base case, these methods are implemented where the stock price process follows geometric Brownian motion. However the focus of the thesis is to implement the Monte Carlo methods for two pure jump L évy models, namely the variance gamma and the normal inverse Gaussian models. We first provide a broad discussion on some of the properties of L évy processes, followed by a study of the variance gamma model of Madan et al. [1998] and the normal inverse Gaussian model of Barndor -Nielsen [1995]. We also provide an implementation of a variation of the calibration procedure of Cont and Tankov [2004b] for these models. We conclude with an analysis of results obtained from pricing American options using these models.

AFRIKAANSE OPSOMMING: Ons bestudeer Monte Carlo metodes wat Amerikaanse opsies, waar die aandeleprys dinamika die patroon van die eksponensiële suiwer sprong L évy modelle volg, prys. Ons neem slegs aandeleprys dinamika vir 'n enkele aandeel in ag. Die tesis begin met 'n algemene inleiding tot Amerikaanse Monte Carlo metodes. Daarna bestudeer ons twee klasse metodes. Die eerste behels regressie - ons bestudeer die regressiemetode van Tsitsiklis and Van Roy [2001] vlugtig en analiseer die least squares Monte Carlo metode van Longsta and Schwartz [2001] in detail. Ons gee ook aandag aan die variansie reduksie tegnieke van Rasmussen [2005] wat van toepassing is op die least squares Monte Carlo metodes. Die stochastic mesh metode van Broadie and Glasserman [2004] val in die tweede klas wat ons onder oë neem. Ons sal ook aandag gee aan die dual metode, wat 'n hoë bias skatting van 'n stop reël skep, en afsonderlik deur Andersen and Broadie [2004], Rogers [2002] and Haugh and Kogan [March 2004] bestudeer is. Die reëls wat ons bestudeer is skattings van die grense tussen die voortsettings- en oefenareas van die opsie. Ons analiseer in detail hoe om so 'n benadering in die least squares Monte Carlo en stochastic mesh metodes te verkry. Hierdie modelle word geï mplementeer deur beide die pseudo kansgetalgenerator en die verkose beste quasi kansgetalgenerator met brug steekproefneming te gebruik. As 'n basisgeval word hierdie metodes geï mplimenteer wanneer die aandeleprysproses 'n geometriese Browniese beweging volg. Die fokus van die tesis is om die Monte Carlo metodes vir twee suiwer sprong L évy modelle, naamlik die variance gamma en die normal inverse Gaussian modelle, te implimenteer. Eers bespreek ons in breë trekke sommige van die eienskappe van L évy prossesse en vervolgens bestudeer ons die variance gamma model soos in Madan et al. [1998] en die normal inverse Gaussian model soos in Barndor -Nielsen [1995]. Ons gee ook 'n implimentering van 'n variasie van die kalibreringsprosedure deur Cont and Tankov [2004b] vir hierdie modelle. Ons sluit af met die resultate wat verkry is, deur Amerikaanse opsies met behulp van hierdie modelle te prys.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/79994
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