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Exit Problems in Regime-Switching Models

Svetlana Boyarchenko
University of Texas at Austin - Department of Economics

Sergei Levendorskii
University of Leicester - Department of Mathematics

June 2006

Abstract:
This paper provides a general framework for pricing of perpetual American and real options in regime-switching Levy models. In each state of the Markov chain, which determines switches from one Levy process to another one, the payoff stream is a monotone function of the Levy process labelled by the state, which allows for additional switching within each state of the Markov chain (payoffs can be different in different regions of the real line). As applications, we solve exit problems for a price-taking firm.

Keywords: regime switching, Levy processes, real options, exit problems

JEL Classifications: D81, C61, G31

Working Paper Series

Date posted: June 08, 2006 ; Last revised: November 14, 2006

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Exit Problems in Regime-Switching Models (June 2006). Available at SSRN: http://ssrn.com/abstract=906961

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Contact Information

Svetlana I. Boyarchenko (Contact Author) University of Texas at Austin - Department of Economics ( email ) Austin, TX 78712 United States
Sergei Z. Levendorskii University of Leicester - Department of Mathematics ( email ) University Road Leicester, TX LE1 7RH United Kingdom +44(0)1162231794 (Phone)