Advanced Search
MyIDEAS: Login

Pricing Of Perpetual American Options In A Model With Partial Information

Contents:

Author Info

  • PAVEL V. GAPEEV

    ()
    (Department of Mathematics, London School of Economics, Houghton Street, London WC2A 2AE, United Kingdom)

Registered author(s):

    Abstract

    We study the perpetual American call option pricing problem in a model of a financial market in which the firm issuing a traded asset can regulate the dividend rate by switching it between two constant values. The firm dividend policy is unknown for small investors, who can only observe the prices available from the market. The asset price dynamics are described by a geometric Brownian motion with a random drift rate modeled by a continuous time Markov chain with two states. The optimal exercise time of the option for small investors is found as the first time at which the asset price hits a boundary depending on the current state of the filtering dividend rate estimate. The proof is based on an embedding of the initial problem into a two-dimensional optimal stopping problem and the analysis of the associated parabolic-type free-boundary problem. We also provide closed form estimates for the rational option price and the optimal exercise boundary.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.worldscinet.com/cgi-bin/details.cgi?type=pdf&id=pii:S0219024911006450
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: http://www.worldscinet.com/cgi-bin/details.cgi?type=html&id=pii:S0219024911006450
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 15 (2012)
    Issue (Month): 01 ()
    Pages: 1250010-1-1250010-21

    as in new window
    Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:01:p:1250010-1-1250010-21

    Contact details of provider:
    Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml

    Order Information:
    Email:

    Related research

    Keywords: Perpetual American option; stochastic dividend rate; discounted two-dimensional optimal stopping problem; stochastic boundary; diffusion process; hidden Markov chain; filtering estimate; innovation process; parabolic-type free-boundary problem; change-of-variable formula with local time on surfaces;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:15:y:2012:i:01:p:1250010-1-1250010-21. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.