Abstract

References (25)

Beta

Citations (9)

Beta

Download | Share | Email | Add to Briefcase | Buy Hard Copy

Perpetual American Options in Regime-Switching Models

Svetlana Boyarchenko
University of Texas at Austin - Department of Economics

Sergei Levendorskii
University of Leicester - Department of Mathematics

September 5, 2006

Abstract:
In the paper, we solve the pricing problem for perpetual American options in Markov-modulated Levy models. The early exercise boundaries and prices are calculated using an iteration procedure. The pricing procedure is efficient even if the number of states is large provided the transition rates are not large w.r.t. the riskless rates. The payoffs and riskless rates may depend on a state. Special cases are stochastic volatility models and models with stochastic interest rate; both must be modelled as finite-state Markov chains.

Keywords: optimal stopping, American options, regime switching, Levy processes, stochastic volatility models, stochastic interest rate models

JEL Classifications: D81, C61, G31

Working Paper Series

Date posted: September 06, 2006 ; Last revised: January 16, 2007

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Perpetual American Options in Regime-Switching Models (September 5, 2006). Available at SSRN: http://ssrn.com/abstract=928474

Export to: Export Citation What's this?

Contact Information

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