Assessing LSMC for the KT General Real Options Pricing Model

We assess the applicability of (Longstaff and Schwartz, 2001) Least Squares Monte Carlo method to the General Real Options Pricing Model of (Kulatilaka and Trigeorgis, 1994). We study LSMC under six different stochastic processes: GBM, up to three dimensions, models 1, 2 and 3 in (Schwartz, 1997), benchmarking every application by lattice methods. We explore empirically a generalization of proposition 1 page 124 in (Longstaff and Schwartz, 2001) with respect to the number of discretization points, of basis functions and the number of simulated paths. We study the speed precision tradeoff of LSMC individual estimates. Finally, we show their statistical properties.

Autorentext

Giuseppe Alesii has a laurea degree in economics and business from LUISS, Rome, and an MBA degree from NYU-Stern. He is associate professor in corporate finance at the Dept. of Pure and Applied Math of L''Aquila University, Italy. He is a member of several academic finance associations and has published on several refereed journals.