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inria-00487103, version 4

On the Robustness of the Snell envelope

Pierre Del Moral () 1, Peng Hu (Author to contact preferably) 1, Nadia Oudjane () 23, Bruno Rémillard 4

N° RR-7303 (2010)

Abstract: We analyze the robustness properties of the Snell envelope backward evolution equation for the discrete time optimal stopping problem. We consider a series of approximation schemes, including cut-off type approximations, Euler discretization schemes, interpolation models, quantization tree models, and the Stochastic Mesh method of Broadie-Glasserman. In each situation, we provide non asymptotic convergence estimates, including Lp-mean error bounds and exponential concentration inequalities. We deduce these estimates from a single and general robustness property of Snell envelope semigroups. In particular, this analysis allows us to recover existing convergence results for the quantization tree method and to improve significantly the rates of convergence obtained for the Stochastic Mesh estimator of Broadie-Glasserman. In the second part of the article, we propose a new approach using a genealogical tree approximation of the reference Markov process in terms of a neutral type genetic model. In contrast to Broadie-Glasserman Monte Carlo models, the computational cost of this new stochastic particle approximation is linear in the number of sampled points. Some simulations results are provided and confirm the interest of this new algorithm.

  • 1:  ALEA (INRIA Bordeaux - Sud-Ouest)
  • INRIA – Université de Bordeaux – CNRS : UMR5251
  • 2:  Laboratoire Analyse, Géométrie et Application (LAGA)
  • CNRS : UMR7539 – Université Paris XIII - Paris Nord – Université Paris VIII - Vincennes Saint-Denis
  • 3:  EDF R&D
  • EDF
  • 4:  Méthodes Quantitatives de Gestion (MQG)
  • HEC-Montréal
  • Domain : Quantitative Finance/Pricing of Securities
    Mathematics/Optimization and Control
    Mathematics/Numerical Analysis
  • Keywords : Snell envelope – optimal stopping – American option pricing – genealogical trees – interacting particle model
  • Internal note : RR-7303
  • Comment : An adapted version is published in SIAM Journal on Financial Mathematics
  • Available versions :  v1 (2010-05-28) v2 (2010-05-28) v3 (2010-06-09) v4 (2011-01-18)
 
  • inria-00487103, version 4
  • oai:hal.inria.fr:inria-00487103
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  • Submitted on: Saturday, 15 January 2011 18:09:36
  • Updated on: Tuesday, 22 November 2011 16:46:50