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American Options with Stochastic Stopping Time Constraints


Leippold, Markus; Egloff, Daniel (2009). American Options with Stochastic Stopping Time Constraints. Applied Mathematical Finance, 16(3):287-305.

Abstract

This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi et al., we transform the constrained into an unconstrained optimal stopping problem. The transformation replaces the original payoff by the value of a generalized barrier option. We also provide a Monte Carlo method to numerically calculate the option value for multidimensional Markov processes. We adapt the Longstaff-Schwartz algorithm to solve the stochastic Cauchy-Dirichlet problem related to the valuation problem of the barrier option along a set of simulated trajectories of the underlying Markov process.

Abstract

This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi et al., we transform the constrained into an unconstrained optimal stopping problem. The transformation replaces the original payoff by the value of a generalized barrier option. We also provide a Monte Carlo method to numerically calculate the option value for multidimensional Markov processes. We adapt the Longstaff-Schwartz algorithm to solve the stochastic Cauchy-Dirichlet problem related to the valuation problem of the barrier option along a set of simulated trajectories of the underlying Markov process.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 June 2009
Deposited On:30 Oct 2009 06:51
Last Modified:05 Apr 2016 13:30
Publisher:Taylor & Francis
ISSN:1350-486X
Publisher DOI:https://doi.org/10.1080/13504860802645706
Related URLs:http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=42746591&loginpage=Login.asp&site=ehost-live
Other Identification Number:AN 42746591

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