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Model uncertainty and the pricing of American options
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Hobson, David G. and Neuberger, Anthony (2017) Model uncertainty and the pricing of American options. Finance and Stochastics, 21 (1). pp. 285-329. doi:10.1007/s00780-016-0314-2 ISSN 0949-2984.
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Official URL: http://doi.org/10.1007/s00780-016-0314-2
Abstract
The virtue of an American option is that it can be exercised at any time. This right is particularly valuable when there is model uncertainty. Yet almost all the extensive literature on American options assumes away model uncertainty. This paper quantifies the potential value of this flexibility by identifying the supremum on the price of an American option when we do not impose a model, but rather consider the class of all models which are consistent with a family of European call prices. The bound is enforced by a hedging strategy involving these call options which is robust to model error.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||
Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||||
Library of Congress Subject Headings (LCSH): | Options (Finance) -- Mathematical models -- United States, Hedging (Finance) -- Mathematical models -- United States | ||||||||
Journal or Publication Title: | Finance and Stochastics | ||||||||
Publisher: | Springer | ||||||||
ISSN: | 0949-2984 | ||||||||
Official Date: | January 2017 | ||||||||
Dates: |
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Volume: | 21 | ||||||||
Number: | 1 | ||||||||
Page Range: | pp. 285-329 | ||||||||
DOI: | 10.1007/s00780-016-0314-2 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 16 August 2016 | ||||||||
Date of first compliant Open Access: | 3 November 2017 | ||||||||
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