American Derivatives in Dry Markets

62 Pages Posted: 8 Mar 2008

See all articles by Ana Lacerda

Ana Lacerda

affiliation not provided to SSRN

Joao Amaro de Matos

Nova School of Business and Economics

Date Written: March 3, 2008


This paper studies the impact of dry markets for underlying assets on the pricing and optimal exercise of American derivatives. Dry markets are characterized by the possibility of non-existence of trading at certain dates. Such non-existence may be deterministic or probabilistic. Using superreplicating strategies, we derive expectation representations for the range of arbitrage-free values of the derivatives. In the probabilistic case, if we consider an enlarged filtration induced by the price process and the market existence process, ordinary stopping times are required. If not, randomized stopping times are required. Several comparisons of the ranges obtained with the two market restrictions are performed. Finally, we conclude that market incompleteness delays the optimal exercise of American derivatives, although there may exist moments when there is indifference between exercising and selling the American derivative

Keywords: American Derivatives, randomized Stopping Times, Incomplete Markets, Illiquidity

JEL Classification: G12

Suggested Citation

Lacerda, Ana and Amaro de Matos, Joao, American Derivatives in Dry Markets (March 3, 2008). Available at SSRN: or

Ana Lacerda

affiliation not provided to SSRN ( email )

Joao Amaro de Matos (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-038


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