American put options with regime-switching volatility
| Autor: | Bong-Gyu Jang, Hyeng Keun Koo |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2024 |
| Předmět: | |
| Zdroj: | Seonmul yeongu, Vol 32, Iss 2, Pp 86-115 (2024) |
| Druh dokumentu: | article |
| ISSN: | 2713-6647 1229-988X |
| DOI: | 10.1108/JDQS-12-2023-0043/full/pdf |
| Popis: | We present an approach for pricing American put options with a regime-switching volatility. Our method reveals that the option price can be expressed as the sum of two components: the price of a European put option and the premium associated with the early exercise privilege. Our analysis demonstrates that, under these conditions, the perpetual put option consistently commands a higher price during periods of high volatility compared to those of low volatility. Moreover, we establish that the optimal exercise boundary is lower in high-volatility regimes than in low-volatility regimes. Additionally, we develop an analytical framework to describe American puts with an Erlang-distributed random-time horizon, which allows us to propose a numerical technique for approximating the value of American puts with finite expiry. We also show that a combined approach involving randomization and Richardson extrapolation can be a robust numerical algorithm for estimating American put prices with finite expiry. |
| Databáze: | Directory of Open Access Journals |
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