Applying model reference adaptive search to American-style option pricing

Authors:
Huiju Zhang;Michael C. Fu
Affiliations:
University of Maryland, College Park, MD;University of Maryland, College Park, MD
Venue:
Proceedings of the 38th conference on Winter simulation
Year:
2006

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Abstract

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.