A direct solution method for pricing options involving the maximum process (Q2412388): Difference between revisions

The authors provide explicit solutions for optimal stopping problems related to a diffusion process and its running maximum. They use excursion theory for Markov processes and reformulate the original two-dimensional problem as an infinite number of one-dimensional ones. The solution method does not suppose the existence of an optimal threshold and does not impose a smooth-fit condition. The authors illustrate the method through classical and new examples.