Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger
Pricing American-style options by Monte Carlo simulation: alternatives to ordinary least squares
Stathis Tompaidis and ChunyuYang
Abstract
ABSTRACT
We compare OLS regression against several alternatives and find that OLS regression underperforms methods that penalize the size of coefficient estimates when the number of simulation paths is small. Based on our findings, we recommend an alternative method based on a modification of the "matching projection pursuit" that we introduce in this paper.
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