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Least-Squares Monte Carlo Methods for Pricing Options Embedded in Mortgages
Deng DING; Wenfei Wang; Li Wang
2016-03-01
Source PublicationJournal of Applied Finance&Banking
ISSN1792-6580
Volume6Issue:2Pages:1-20
Abstract

This paper studies the pricing problems for options embedded in fixed rate mortgages by simulation. The least-squares Monte Carlo method, which was initiated by Longstaff and Schwartz (Rev. Financ.Stud. 14(1): 113-147, 2001), is applied to price the mortgage default and prepayment options in a financial environment with two stochastic factors: house price and short term interest rate. A series of numerical comparisons for presented methods with the PDE analytical approxi-mation method in (IAENG Int. J. Appl. Math. 39(1): 9, 2009) and the binomial tree method (BTM) (Decis. Econ. Financ. 35(2):171-202, 2012) are given. The simulation experiments show the efficiency of presented methods and some cross-validation of the obtained simulationresults are given.

KeywordLeast-squares Monte Carlo Method Options Embedded In Mortgages Optimal Stopping Dynamic Programming
Language英语
Fulltext Access
Document TypeJournal article
CollectionFaculty of Science and Technology
DEPARTMENT OF MATHEMATICS
Corresponding AuthorWenfei Wang
AffiliationDepartment of Mathematics Faculty of Science and Technology University of Macau, Macao, China
First Author AffilicationFaculty of Science and Technology
Corresponding Author AffilicationFaculty of Science and Technology
Recommended Citation
GB/T 7714
Deng DING,Wenfei Wang,Li Wang. Least-Squares Monte Carlo Methods for Pricing Options Embedded in Mortgages[J]. Journal of Applied Finance&Banking,2016,6(2):1-20.
APA Deng DING,Wenfei Wang,&Li Wang.(2016).Least-Squares Monte Carlo Methods for Pricing Options Embedded in Mortgages.Journal of Applied Finance&Banking,6(2),1-20.
MLA Deng DING,et al."Least-Squares Monte Carlo Methods for Pricing Options Embedded in Mortgages".Journal of Applied Finance&Banking 6.2(2016):1-20.
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