Volatility and dividend risk in perpetual American options

DOI10.1088/1742-5468/2007/04/P04002zbMATH Open1459.91197arXivphysics/0610047MaRDI QIDQ5239351FDOQ5239351

Authors: Miquel Montero 

Publication date: 22 October 2019

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

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.

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

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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)

Cites Work

• The pricing of options and corporate liabilities
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• Title not available (Why is that?)
• Stock price distributions with stochastic volatility: an analytic approach
• Option pricing when underlying stock returns are discontinuous
• American options with stochastic dividends and volatility: a nonparametric investigation
• A simple model for option pricing with jumping stochastic volatility
• Smooth pasting as rate of return equalization
• Perpetual American options with fractional Brownian motion

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
• Title not available (Why is that?)
• 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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