Canonical Least-Squares Monte Carlo: Empirical Evidences from S&P 100 Index and IBM Puts

15 Pages Posted: 24 Mar 2010

See all articles by Qiang Liu

Qiang Liu

Southwestern University of Finance and Economics - Institute of Chinese Financial Studies

Xisheng Yu

Southwestern University of Finance and Economics (SWUFE)

Date Written: March 17, 2010

Abstract

This paper tests empirically the recently proposed canonical least-squares Monte-Carlo (CLM) method for pricing American options. Market data used are daily last prices for the American style S&P 100 Index puts (OEX puts) and IBM puts from 30 July 2008 to 30 January 2009, the period of which covers the US financial crisis of 2008. Unlike what have been done in many other similar empirical studies, rates interpolated from the US Treasury yield curve are used, and dividends, a continuous constant yield for the S&P 100 Index and a fixed cash amount for the IBM common stock, are taken into consideration. Compared with the benchmark prices from finite difference using historic volatilities, CLM outperforms in almost all twelve categories of moneyness and maturity for both OEX and IBM puts, and is shown to be a viable alternative for pricing American style options.

Keywords: canonical least-squares Monte-Carlo, CLM; American options, OEX put, IBM put, S&P 100 Index, empirical study

JEL Classification: G13, G12

Suggested Citation

Liu, Qiang and Yu, Xisheng, Canonical Least-Squares Monte Carlo: Empirical Evidences from S&P 100 Index and IBM Puts (March 17, 2010). Available at SSRN: https://ssrn.com/abstract=1573405 or http://dx.doi.org/10.2139/ssrn.1573405

Qiang Liu (Contact Author)

Southwestern University of Finance and Economics - Institute of Chinese Financial Studies ( email )

423 Gezhi Building
555 Liutai Boulevard, Wenjiang
Chengdu, Sichuan 611130
China

HOME PAGE: http://129.news.swufe.edu.cn/4282.html

Xisheng Yu

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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