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On the regularity of American options with regime-switching uncertainty

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Jacka, Saul D. and Ocejo, Adriana (2017) On the regularity of American options with regime-switching uncertainty. Stochastic Processes and their Applications, 128 (3). pp. 803-818. doi:10.1016/j.spa.2017.06.007

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Official URL: https://doi.org/10.1016/j.spa.2017.06.007

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Abstract

We study the regularity of the stochastic representation of the solution of a class of initial-boundary value problems related to a regime-switching diffusion.
This representation is related to the value function of a finite-horizon optimal stopping problem such as the price of an American-style option in finance. We show continuity and smoothness of the value function using coupling and time-change techniques. As an application, we find the minimal payo scenario for the holder
of an American-style option in the presence of regime-switching uncertainty under the assumption that the transition rates are known to lie within level-dependent compact sets.

Item Type: Journal Article
Divisions: Faculty of Science > Statistics
Journal or Publication Title: Stochastic Processes and their Applications
Publisher: Elsevier Science BV
ISSN: 0304-4149
Official Date: 29 June 2017
Dates:
DateEvent
29 June 2017Available
7 June 2017Accepted
Volume: 128
Number: 3
Page Range: pp. 803-818
DOI: 10.1016/j.spa.2017.06.007
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Funder: Engineering and Physical Sciences Research Council (EPSRC)
Grant number: EP/P00377X/1 ; EP/N510129/1

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