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Applying Model Reference Adaptive Search to American-Style Option Pricing

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2 Author(s)
Huiju Zhang ; R. H. Smith Sch. of Bus., Maryland Univ., College Park, MD ; Fu, M.C.

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

Published in:

Simulation Conference, 2006. WSC 06. Proceedings of the Winter

Date of Conference:

3-6 Dec. 2006