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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
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: |
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| Date of first compliant deposit: | 30 June 2017 | ||||||
| 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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