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Fast pricing of American-style options has been a difficult problem since it was first introduced to financial markets in 1970s, especially when the underlying stocks' prices follow some jump-diffusion processes. In this paper, we propose a new algorithm to generate tight upper bounds on the Bermudan option price without nested simulation, under the jump-diffusion setting. By exploiting the martingale...
Duality in Markov decision processes (MDPs) has been studied recently by several researchers with the goal to derive dual bounds on the value function. In this paper we propose the idea of using parameterized penalty functions in the dual representation of MDPs, which allows us to integrate different types of penalty functions and guarantees a tighter dual bound with more penalties used. To complement...
Stochastic volatility models capture the impact of time-varying volatility on the financial markets, and hence are heavily used in financial engineering. However, stochastic volatility is not directly observable in reality, but is only “partially” observable through the inference from the observed asset price. Most of the past research studied American option pricing in stochastic volatility models...
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