The least squares Monte Carlo (LSM) algorithm proposed by Longstaff and Schwartz (2001) is widely used for pricing Bermudan options. The LSM estimator contains undesirable look-ahead bias, and the conventional technique of avoiding it requires additional simulation paths. We present the leave-one-out LSM (LOOLSM) algorithm to eliminate look-ahead bias without doubling simulations. We also show that look-ahead bias is asymptotically proportional to the regressors-to-paths ratio. Our findings are demonstrated with several option examples in which the LSM algorithm overvalues the options. The LOOLSM method can be extended to other regression-based algorithms that improve the LSM method.
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