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American options with multiple priors in continuous time

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  • Jörg Vorbrink

    (Institute of Mathematical Economics, Bielefeld University)

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    Abstract

    We investigate American options in a multiple prior setting of continuous time and determine optimal exercise strategies form the perspective of an ambiguity averse buyer. The multiple prior setting relaxes the presumption of a known distribution of the stock price process and captures the idea of incomplete information of the market data leading to model uncertainty. Using the theory of (reflected) backward stochastic differential equations we are able to solve the optimal stopping problem under multiple priors and identify the particular worst-case scenario in terms of the worst-case prior. By means of the analysis of exotic American options we highlight the main difference to classical single prior models. This is characterized by a resulting endogenous dynamic structure of the worst-case scenario generated by model adjustments of the agent due to particular occurring events that change the agent’s beliefs.

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    File URL: http://www.imw.uni-bielefeld.de/papers/files/imw-wp-448.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 448.

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    Length: 36 pages
    Date of creation: Apr 2011
    Date of revision:
    Handle: RePEc:bie:wpaper:448

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    Related research

    Keywords: optimal stopping for exotic American options; uncertainty aversion; multiple priors; robustness; (reflected) BSDEs;

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