Monte Carlo methods for pricing and hedging American options in high dimension

Abstract

We numerically compare some recent Monte Carlo algorithms devoted to the pricing and hedging American options in high dimension. In particular, the comparison concerns the quantization method of Barraquand–Martineau and an algorithm based on Malliavin calculus. The (pure) Malliavin calculus algorithm improves the precision of the computation of the delta but, merely for pricing purposes, is uncompetitive with respect to other Monte Carlo methods in terms of computing time. Here, we propose to suitably combine the Malliavin calculus approach with the Barraquand–Martineau algorithm, using a variance reduction technique based on control variables. Numerical tests for pricing and hedging American options in high dimension are given in order to compare the different methodologies.