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Double continuation regions for American options under Poisson exercise opportunities

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  • Zbigniew Palmowski
  • José Luis Pérez
  • Kazutoshi Yamazaki

Abstract

We consider the Lévy model of the perpetual American call and put options with a negative discount rate under Poisson observations. Similar to the continuous observation case, the stopping region that characterizes the optimal stopping time is either a half‐line or an interval. The objective of this paper is to obtain explicit expressions of the stopping and continuation regions and the value function, focusing on spectrally positive and negative cases. To this end, we compute the identities related to the first Poisson arrival time to an interval via the scale function and then apply those identities to the computation of the optimal strategies. We also discuss the convergence of the optimal solutions to those in the continuous observation case as the rate of observation increases to infinity. Numerical experiments are also provided.

Suggested Citation

  • Zbigniew Palmowski & José Luis Pérez & Kazutoshi Yamazaki, 2021. "Double continuation regions for American options under Poisson exercise opportunities," Mathematical Finance, Wiley Blackwell, vol. 31(2), pages 722-771, April.
    • Handle: RePEc:bla:mathfi:v:31:y:2021:i:2:p:722-771
    DOI: 10.1111/mafi.12301
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    References listed on IDEAS

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    1. Jos'e-Luis P'erez & Kazutoshi Yamazaki, 2023. "L\'evy bandits under Poissonian decision times," Papers 2301.07798, arXiv.org.
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