A direct solution method for pricing options in regime‐switching models
| Autor: | Masahiko Egami, Rusudan Kevkhishvili |
|---|---|
| Rok vydání: | 2020 |
| Předmět: |
Economics and Econometrics
Mathematical optimization 050208 finance Direct solution method Computer science Applied Mathematics media_common.quotation_subject 05 social sciences Contrast (statistics) Regime switching 01 natural sciences 010104 statistics & probability Valuation of options Accounting Bellman equation 0502 economics and business Value (economics) Optimal stopping Simplicity 0101 mathematics Social Sciences (miscellaneous) Finance media_common |
| Zdroj: | Mathematical Finance. 30:547-576 |
| ISSN: | 1467-9965 0960-1627 |
| DOI: | 10.1111/mafi.12220 |
| Popis: | Pricing financial or real options with arbitrary payoffs in regime-switching models is an important problem in finance. Mathematically, it is to solve, under certain standard assumptions, a general form of optimal stopping problems in regime-switching models. In this article, we reduce an optimal stopping problem with an arbitrary value function in a two-regime environment to a pair of optimal stopping problems without regime switching. We then propose a method for finding optimal stopping rules using the techniques available for non-switching problems. In contrast to other methods, our systematic solution procedure is more direct since we first obtain the explicit form of the value functions. In the end, we discuss an option pricing problem which may not be dealt with by the conventional methods, demonstrating the simplicity of our approach. |
| Databáze: | OpenAIRE |
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