On the behaviour near expiry for multi-dimensional American options (Q2465175)

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On the behaviour near expiry for multi-dimensional American options
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    On the behaviour near expiry for multi-dimensional American options (English)
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    8 January 2008
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    The assumptions on the market of this paper are given within a generalized Black-Scholes framework. It is assumed that the logarithms of the prices solve a system of stochastic differential equations with \(n\)-dimensional Wiener process and that a positive and continuous instantaneous interest rate \(\rho\) exists. The American option of the general form \(\Psi(S_1(t),\ldots,S_n(t))\) with a time horizon \(T>0\) is considered, where \(\Psi\) is a real-valued Lipschitz function. Under some additional ellipticity conditions the behaviour near expiry of the free boundary, or optimal exercise boundary, connected with the unique fair price, is analyzed. The regularity for the pricing function is proved up to the terminal state. Also, a sufficient criteria is established for the statement that the optimal exercise boundary approaches the terminal state faster than parabolically.
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    American option
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    parabolic obstacle problem
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    free boundary
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