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Early exercise decision in American options with dividends, stochastic volatility and jumps

Listed author(s):
  • Antonio Cosma
  • Stefano Galluccio
  • Paola Pederzoli
  • Olivier Scaillet

Using a fast numerical technique, we investigate a large database of investor suboptimal non-exercise of short maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modelling of the discrete dividend is essential for a correct calculation of the early exercise boundary as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black-Scholes-Merton benchmark cuts by a quarter the amount lost by investors through suboptimal exercise. The remaining three quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise.

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File URL: http://arxiv.org/pdf/1612.03031
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Paper provided by arXiv.org in its series Papers with number 1612.03031.

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Date of creation: Dec 2016
Handle: RePEc:arx:papers:1612.03031
Contact details of provider: Web page: http://arxiv.org/

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