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American option prices in a Markov chain market model

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  • John van der Hoek
  • Robert J. Elliott

Abstract

This paper is a sequel to our previous paper ‘A New Paradigm in Asset Pricing’ in which we construct a model for asset pricing in a world where the randomness is modeled by a Markov chain. In this paper we develop a theory of optimal stopping and related variational inequalities for American options in this model. A version of Saigal's Lemma is established and numerical results obtained. Copyright © 2011 John Wiley & Sons, Ltd.

Suggested Citation

  • John van der Hoek & Robert J. Elliott, 2012. "American option prices in a Markov chain market model," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 28(1), pages 35-59, January.
    • Handle: RePEc:wly:apsmbi:v:28:y:2012:i:1:p:35-59
    DOI: 10.1002/asmb.893
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    Cited by:

    1. Zhang, Xiang & Li, Lingfei & Zhang, Gongqiu, 2021. "Pricing American drawdown options under Markov models," European Journal of Operational Research, Elsevier, vol. 293(3), pages 1188-1205.
    2. Hu, Yuan & Lindquist, W. Brent & Rachev, Svetlozar T. & Shirvani, Abootaleb & Fabozzi, Frank J., 2022. "Market complete option valuation using a Jarrow-Rudd pricing tree with skewness and kurtosis," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    3. Qing Zhang, 2013. "When to sell a Markov chain asset?," Papers 1309.7507, arXiv.org.
    4. Ali Nasir & Ambreen Khursheed & Kazim Ali & Faisal Mustafa, 2021. "A Markov Decision Process Model for Optimal Trade of Options Using Statistical Data," Computational Economics, Springer;Society for Computational Economics, vol. 58(2), pages 327-346, August.

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