Pricing Of Perpetual American Options In A Model With Partial Information
AbstractWe 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 InfoIf 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.
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 InfoArticle 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 ()
Contact details of provider:
Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral 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 references are entirely missing, you can add them using this form.