Discounted Optimal Stopping for Maxima of some Jump-Diffusion Processes
AbstractWe present solutions to some discounted optimal stopping problems for the maximum process in a model driven by a Brownian motion and a compound Poisson process with exponential jumps. The method of proof is based on reducing the initial problems to integro-differential free-boundary problems where the normal reflection and smooth fit may break down and the latter then be replaced by the continuous fit. The results can be interpreted as pricing perpetual American lookback options with fixed and floating strikes in a jump-diffusion model.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-059.
Length: 25 pages
Date of creation: Sep 2006
Date of revision:
Discounted optimal stopping problem; Brownian motion; compound Poisson process; maximum process; integro-differential free-boundary problem; continuous and smooth fit; normal reflection; a change-of-variable formula with local time on surfaces; perpetual lookback American options;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- S. G. Kou & Hui Wang, 2004. "Option Pricing Under a Double Exponential Jump Diffusion Model," Management Science, INFORMS, vol. 50(9), pages 1178-1192, September.
- Duistermaat, J.J. & Kyprianou, A.E. & van Schaik, K., 2005. "Finite expiry Russian options," Stochastic Processes and their Applications, Elsevier, vol. 115(4), pages 609-638, April.
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