In this article we explain a recognised technique for sophisticated risk modelling, LSMC. This simulation-based method is used to simplify valuations that require nested simulations to be reliable and accurate. A key aspect of LSMC is the regression function used to reduce the number of inner scenarios, as its composition can affect the performance of the simulation technique.
Monte Carlo Simulation
An Introduction to Least-Squares Monte Carlo Simulation
In this part we introduce a recognised technique for sophisticated risk modelling, Least-Squares Monte Carlo.