Analysis of the optimal exercise boundary of American options for jump diffusions

DOI10.1137/080712519MaRDI QIDQ3553810zbMATH OpenOpenAlexFDO

Authors Erhan Bayraktar, Hao Xing

Publication date 21 April 2010

Published in SIAM Journal on Mathematical Analysis (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0712.3323

zbMATH Keywords

American put optionboundary value problemfree boundaryintegro-differential equationjump diffusionmaturity

Mathematics Subject Classification ID

Free boundary problems for PDEs (35R35) Integro-partial differential equations (45K05) Random measures (60G57) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: In this paper we show that the optimal exercise boundary / free boundary of the American put option pricing problem for jump diffusions is continuously differentiable (except at the maturity). This differentiability result has been established by Yang et al. (European Journal of Applied Mathematics, 17(1):95-127, 2006) in the case where the condition $rgeqq+lambdain{t}_{R_{+}}(e^z-1)u(dz)$ is satisfied. We extend the result to the case where the condition fails using a unified approach that treats both cases simultaneously. We also show that the boundary is infinitely differentiable under a regularity assumption on the jump distribution.

Recommendations

• Free boundary and American options in a jump-diffusion model
• Exercise boundary of American-style Asian option
• Optimal stopping, free boundary, and American option in a jump-diffusion model
• A proof of the smoothness of the finite time horizon American put option for jump diffusions
• Optimal exercise boundary via intermediate function with jump risk

Cited in

(24)

• Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions
• Value function regularity in option pricing problems under a pure jump model
• Optimal exercise boundary via intermediate function with jump risk
• Hybrid Laplace transform and finite difference methods for pricing American options under complex models
• Optimal exercise boundary of American fractional lookback option in a mixed jump-diffusion fractional Brownian motion environment
• An analytical study of participating policies with minimum rate guarantee and surrender option
• A new integral equation approach for pricing American-style barrier options with rebates
• Exercise boundary of American-style Asian option
• An optimal stopping problem in a diffusion-type model with delay
• ESO valuation with job termination risk and jumps in stock price
• Sensitivity analysis of the optimal exercise boundary of the American put option
• Free boundary and retirement benefits pricing in a jump-diffusion model
• Valuation of American option in a double exponential jump-diffusion model with stochastic volatility
• Free boundary and American options in a jump-diffusion model
• A proof of the smoothness of the finite time horizon American put option for jump diffusions
• Regularity of the American put option in the Black-Scholes model with general discrete dividends
• Nonconvexity of the optimal exercise boundary for an American put option on a dividend-paying asset
• Continuity estimate of the optimal exercise boundary with respect to volatility for the American foreign exchange put option
• Mathematical analysis of the early exercise boundary for the American put option
• Optimal stopping, free boundary, and American option in a jump-diffusion model
• On the Continuity of Optimal Stopping Surfaces for Jump-Diffusions
• Optimal dividend payout problem under both diffusion risk and Poisson risk in finite horizon
• A probabilistic approach to continuous differentiability of optimal stopping boundaries
• The early exercise boundary under the jump to default extended CEV model

This page was built for publication: Analysis of the optimal exercise boundary of American options for jump diffusions

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q3553810)