Exit Problems in Regime-Switching Models
29 Pages Posted: 8 Jun 2006
Date Written: June 2006
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
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