European Business Schools Librarian's Group
Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No 02-23: Efficient Control Variates and Strategies for Bermudan Swaptions in a Libor Market Model
Malene Shin Jensen () and Mikkel Svenstrup ()
Additional contact information
Malene Shin Jensen: Department of Management, University of Aarhus, Postal: Bartholins Alle, bygning 322, Universitetsparken, 8000 Århus C, Denmark
Mikkel Svenstrup: Department of Finance, Aarhus School of Business, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: This paper concerns the problem of valuing Bermudan swaptions in
a Libor market model. In particular we consider various efficiency improvement
techniques for a Monte Carlo based valuation method. We
suggest a simplification of the Andersen (2000) exercise strategy and find
it to be much more efficient. Furthermore, we test a range of control
variates for Bermudan swaptions using a control variate technique for
American options proposed in Rasmussen (2002). Application of these
efficiency improvements in the Primal-Dual simulation algorithm of Andersen
& Broadie (2001) improves both upper and lower bounds for the
price estimates. For the Primal-Dual simulation algorithm we examine
the variance-bias trade-off between the numbers of outer an inner paths.
Finally, we demonstrate that the presence of stochastic volatility increases
the expected losses from using the simple strategy in Andersen (2000).
Keywords: Bermudan Swaptions; Control Variates; Exercise Strategy; Primal-Dual Algorithm; Stochastic Volatility
35 pages, May 9, 2002
Full text files
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