Volatility and dividend risk in perpetual American options

DOI10.1088/1742-5468/2007/04/P04002MaRDI QIDQ5239351zbMATH OpenFDO

Authors Miquel Montero

Publication date 22 October 2019

Published in Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/physics/0610047

zbMATH Keywords

stochastic processesfinancial instruments and regulationmodels of financial marketsrisk measure and management

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91)

Abstract: American options are financial instruments that can be exercised at any time before expiration. In this paper we study the problem of pricing this kind of derivatives within a framework in which some of the properties --volatility and dividend policy-- of the underlaying stock can change at a random instant of time, but in such a way that we can forecast their final values. Under this assumption we can model actual market conditions because some of the most relevant facts that may potentially affect a firm will entail sharp predictable effects. We will analyse the consequences of this potential risk on perpetual American derivatives, a topic connected with a wide class of recurrent problems in physics: holders of American options must look for the fair price and the optimal exercise strategy at once, a typical question of free absorbing boundaries. We present explicit solutions to the most common contract specifications and derive analytical expressions concerning the mean and higher moments of the exercise time.

Recommendations

• Perpetual American vanilla option pricing under single regime change risk: an exhaustive study
• Perpetual American options in diffusion-type models with running maxima and drawdowns
• Perpetual American options in incomplete markets: the infinitely divisible case
• Perpetual American options in a diffusion model with piecewise-linear coefficients
• Pricing of perpetual American options in a model with partial information

Cites work

• scientific article; zbMATH DE number 6137478 (Why is no real title available?)
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• A simple model for option pricing with jumping stochastic volatility
• American options with stochastic dividends and volatility: a nonparametric investigation
• Option pricing when underlying stock returns are discontinuous
• Perpetual American options with fractional Brownian motion
• Smooth pasting as rate of return equalization
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• The pricing of options and corporate liabilities

Cited in

(8)

• American perpetual options with random start
• Perpetual American options in diffusion-type models with running maxima and drawdowns
• On the Convexity and Risk-Sensitivity of the Price of American Interest Rate Derivatives
• Perpetual American vanilla option pricing under single regime change risk: an exhaustive study
• Pricing of perpetual American options in a model with partial information
• scientific article; zbMATH DE number 5152227 (Why is no real title available?)
• The valuation of permanent American options in the presence of event risk
• Perpetual American options in incomplete markets: the infinitely divisible case

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