Variational Formulation of American Option Prices in the Heston Model
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Stopping times; optimal stopping problems; gambling theory (60G40) Complementarity and equilibrium problems and variational inequalities (finite dimensions) (aspects of mathematical programming) (90C33) Stochastic models in economics (91B70) Derivative securities (option pricing, hedging, etc.) (91G20)
Abstract: We give an analytical characterization of the price function of an American option in Heston-type models. Our approach is based on variational inequalities and extends recent results of Daskalopoulos and Feehan (2011). We study the existence and uniqueness of a weak solution of the associated degenerate parabolic obstacle problem. Then, we use suitable estimates on the joint distribution of the log-price process and the volatility process in order to characterize the analytical weak solution as the solution to the optimal stopping problem. We also rely on semi-group techniques and on the affine property of the model.
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Cited in
(9)- A two-dimensional control problem arising from dynamic contracting theory
- American option model and negative Fichera function on degenerate boundary
- Representation of American option prices under Heston stochastic volatility dynamics using integral transforms
- Analytic solutions and complete markets for the Heston model with stochastic volatility
- American options in the Volterra Heston model
- Analytic approach to solve a degenerate parabolic PDE for the Heston model
- Analysis of VIX-linked fee incentives in variable annuities via continuous-time Markov chain approximation
- On the Continuity of Optimal Stopping Surfaces for Jump-Diffusions
- An efficient and provable sequential quadratic programming method for American and swing option pricing
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