American Options: The Epv Pricing Model

19 Pages Posted: 19 May 2004

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Abstract

We explicitly solve the pricing problem for perpetual American puts and calls, and provide an efficient semi-explicit pricing procedure for options with finite time horizon. Contrary to the standard approach, which uses the price process as a primitive, we model the price process as the expected present value of a stream, which is a monotone function of a Levy process. Certain processes exhibiting mean-reverting, stochastic volatility and/or switching features can be modelled in this way. This specification allows us to consider assets that pay no dividends at all when the level of the underlying stochastic factor is too low, assets that pay dividends at a fixed rate when the underlying stochastic process remains in some range, or capped dividends.

Keywords: Levy processes, option pricing, dividend paying assets

JEL Classification: C61, D81, G12

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., American Options: The Epv Pricing Model. Available at SSRN: https://ssrn.com/abstract=547863 or http://dx.doi.org/10.2139/ssrn.547863

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

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