Dynamic programming for optimal stopping via pseudo-regression
- Bayer, Christian
- Redmann, Martin
- Schoenmakers, John G. M.
2010 Mathematics Subject Classification
- 60G40 65C05 62J05
- American options, optimal stopping, linear regression
We introduce new variants of classical regression-based algorithms for optimal stopping problems based on computation of regression coefficients by Monte Carlo approximation of the corresponding L2 inner products instead of the least-squares error functional. Coupled with new proposals for simulation of the underlying samples, we call the approach "pseudo regression". We show that the approach leads to asymptotically smaller errors, as well as less computational cost. The analysis is justified by numerical examples.
- Quant. Finance, (2020), published online 01.09.2020, DOI 10.1080/14697688.2020.1780299 .