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Optimal stopping in Levy models, for non-monotone discontinuous payoffs

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  • Boyarchenko, Svetlana
  • Levendorskii, Sergei

Abstract

We give short proofs of general theorems about optimal entry and exit problems in Levy models, when payoff streams may have discontinuities and be non-monotone. As applications, we consider exit and entry problems in the theory of real options, and an entry problem with an embedded option to exit.

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File URL: http://mpra.ub.uni-muenchen.de/27999/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27999.

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Date of creation: Sep 2010
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Handle: RePEc:pra:mprapa:27999

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Keywords: optimal stopping; Levy processes; non-monotone discontinuous payoffs;

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References

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  1. Svetlana Boyarchenko & Sergey Levendorskiy, 2004. "Optimal stopping made easy," Finance, EconWPA 0410016, EconWPA.
  2. Asmussen, Søren & Avram, Florin & Pistorius, Martijn R., 2004. "Russian and American put options under exponential phase-type Lévy models," Stochastic Processes and their Applications, Elsevier, Elsevier, vol. 109(1), pages 79-111, January.
  3. Mitya Boyarchenko & Sergei Levendorskiĭ, 2009. "Prices And Sensitivities Of Barrier And First-Touch Digital Options In Lévy-Driven Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 12(08), pages 1125-1170.
  4. Kerry Back & Dirk Paulsen, 2009. "Open-Loop Equilibria and Perfect Competition in Option Exercise Games," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(11), pages 4531-4552, November.
  5. Svetlana Boyarchenko & Sergei Levendorski&icaron;, 2007. "Practical Guide To Real Options In Discrete Time," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 311-342, 02.
  6. Boyarchenko, Svetlana & Levendorskii, Sergei, 2008. "Exit problems in regime-switching models," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 180-206, January.
  7. Frank Riedel, 2009. "Optimal Stopping With Multiple Priors," Econometrica, Econometric Society, Econometric Society, vol. 77(3), pages 857-908, 05.
  8. Boyarchenko Svetlana & Levendorskii Sergei Z, 2006. "General Option Exercise Rules, with Applications to Embedded Options and Monopolistic Expansion," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 6(1), pages 1-51, June.
  9. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
  10. Svetlana Boyarchenko & Sergei Levendorskii, 2005. "American options: the EPV pricing model," Annals of Finance, Springer, Springer, vol. 1(3), pages 267-292, 08.
  11. Ernesto Mordecki, 2002. "Optimal stopping and perpetual options for Lévy processes," Finance and Stochastics, Springer, vol. 6(4), pages 473-493.
  12. Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, American Economic Association, vol. 94(3), pages 557-568, June.
  13. Michael D. Whinston, 1988. "Exit with Multiplant Firms," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 568-588, Winter.
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