An adaptive Monte Carlo algorithm for European and American options

Abstract

Abstract. In this paper, a new adaptive Monte Carlo algorithm is proposed to solve systems of linear algebraic equations (SLAEs). The corresponding properties of the algorithm and its advantages over the conventional and previous adaptive Monte Carlo algorithms are discussed and theoretical results are established to justify the convergence of the algorithm. Furthermore, the algorithm is used to solve the SLAEs obtained from finite difference method for the problem of European and American options pricing. Numerical tests are performed on examples with matrices of different size and on SLAEs coming from option pricing problems. Comparisons with standard numerical and stochastic algorithms are also done which demonstrate the computational efficiency of the proposed algorithm.