Perpetual American options with asset-dependent discounting

DOI10.1007/S00245-023-10084-4arXiv2007.09419OpenAlexW3121711493MaRDI QIDQ6139952FDOQ6139952

Zbigniew Palmowski, Jonas Al-Hadad

Publication date: 19 January 2024

Published in: Applied Mathematics and Optimization (Search for Journal in Brave)

Abstract: In this paper we consider the following optimal stopping problem ${\displaystyle }$V^{omega}_{ m A}(s) = sup_{ auinmathcal{T}} mathbb{E}_{s}[e^{-int_0^ au omega(S_w) dw} g(S_ au)],${\displaystyle }$ where the process $S_t$ is a jump-diffusion process, $mathcalT$ is a family of stopping times while $g$ and $omega$ are fixed payoff function and discount function, respectively. In a financial market context, if $g(s)=(K-s{)}^{+}$ or $g(s)=(s-K{)}^{+}$ and $mathbbE$ is the expectation taken with respect to a martingale measure, $V_{mA}^{omega}(s)$ describes the price of a perpetual American option with a discount rate depending on the value of the asset process $S_t$. If $omega$ is a constant, the above problem produces the standard case of pricing perpetual American options. In the first part of this paper we find sufficient conditions for the convexity of the value function $V_{mA}^{omega}(s)$. This allows us to determine the stopping region as a certain interval and hence we are able to identify the form of $V_{mA}^{omega}(s)$. We also prove a put-call symmetry for American options with asset-dependent discounting. In the case when $S_t$ is a geometric L'evy process we give exact expressions using the so-called omega scale functions introduced in Li and Palmowski (2018). We prove that the analysed value function satisfies the HJB equation and we give sufficient conditions for the smooth fit property as well. Finally, we present a few examples for which we obtain the analytical form of the value function $V_{mA}^{omega}(s)$.

Full work available at URL: https://arxiv.org/abs/2007.09419

zbMATH Keywords

diffusionAmerican optionconvexityoptimal stopping problemBlack-Scholes marketLévy process

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40)

Cites Work

• Financial Modelling with Jump Processes
• Title not available (Why is that?)
• Title not available (Why is that?)
• Introductory lectures on fluctuations of Lévy processes with applications.
• Title not available (Why is that?)
• Title not available (Why is that?)
• Exit problems for spectrally negative Lévy processes and applications to (Canadized) Russian options
• A technique for exponential change of measure for Markov processes
• Step options.
• Title not available (Why is that?)
• The Valuation of Executive Stock Options in an Intensity-Based Framework *
• Properties of American option prices
• Some remarks on first passage of Lévy processes, the American put and pasting principles
• Lévy matters II. Recent progress in theory and applications: fractional Lévy fields, and scale functions.
• American options: symmetry properties
• Symmetry and duality in Lévy markets
• Last Exit Before an Exponential Time for Spectrally Negative Lévy Processes
• Convexity preserving jump-diffusion models for option pricing
• Optimal stopping with irregular reward functions
• Fluctuations of Omega-killed spectrally negative Lévy processes
• Preservation of convexity of solutions to parabolic equations
• On the smoothness of value functions and the existence of optimal strategies in diffusion models
• PROPERTIES OF OPTION PRICES IN MODELS WITH JUMPS
• The Smooth-Fit Property in an Exponential Lévy Model
• Real options with a double continuation region
• Double continuation regions for American and Swing options with negative discount rate in Lévy models
• Global \(C^1\) regularity of the value function in optimal stopping problems
• The drift burst hypothesis
• On the optimality of threshold type strategies in single and recursive optimal stopping under Lévy models

This page was built for publication: Perpetual American options with asset-dependent discounting

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6139952)