Sequential Monte Carlo Pricing Of American-Style Options Under Stochastic Volatility Models
The authors introduce a new method to price American-style options on underlying investments governed by Stochastic Volatility (SV) models. The method does not require the volatility process to be observed. Instead, it exploits the fact that the optimal decision functions in the corresponding dynamic programming problem can be expressed as functions of conditional distributions of volatility, given observed data. By constructing statistics summarizing information about these conditional distributions, one can obtain high quality approximate solutions.