Exit Problems in Regime-Switching Models

29 Pages Posted: 8 Jun 2006

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Date Written: 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 Classification: D81, C61, G31

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Exit Problems in Regime-Switching Models (June 2006). Available at SSRN: https://ssrn.com/abstract=906961 or http://dx.doi.org/10.2139/ssrn.906961

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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