Optimal stopping, free boundary, and American option in a jump-diffusion model

Optimal stopping, free boundary, and American option in a jump-diffusion model This paper considers the American put option valuation in a jump-diffusion model and relates this optimal-stopping problem to a parabolic integro-differential free-boundary problem, with special attention to the behavior of the optimal-stopping boundary. We study the regularity of the American option value and obtain in particular a decomposition of the American put option price as the sum of its counterpart European price and the early exercise premium. Compared with the Black-Scholes (BS) (5) model, this premium has an additional term due to the presence of jumps. We prove the continuity of the free boundary and also give one estimate near maturity, generalizing a recent result of Barles et al. (3) for the BS model. Finally, we study the effect of the market price of jump risk and the intensity of jumps on the American put option price and its critical stock price. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematics and Optimization Springer Journals

Optimal stopping, free boundary, and American option in a jump-diffusion model

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Publisher
Springer-Verlag
Copyright
Copyright © 1997 by Springer-Verlag New York Inc.
Subject
Mathematics; Systems Theory, Control; Calculus of Variations and Optimal Control; Optimization; Mathematical and Computational Physics; Mathematical Methods in Physics; Numerical and Computational Methods
ISSN
0095-4616
eISSN
1432-0606
D.O.I.
10.1007/BF02683325
Publisher site
See Article on Publisher Site

Abstract

This paper considers the American put option valuation in a jump-diffusion model and relates this optimal-stopping problem to a parabolic integro-differential free-boundary problem, with special attention to the behavior of the optimal-stopping boundary. We study the regularity of the American option value and obtain in particular a decomposition of the American put option price as the sum of its counterpart European price and the early exercise premium. Compared with the Black-Scholes (BS) (5) model, this premium has an additional term due to the presence of jumps. We prove the continuity of the free boundary and also give one estimate near maturity, generalizing a recent result of Barles et al. (3) for the BS model. Finally, we study the effect of the market price of jump risk and the intensity of jumps on the American put option price and its critical stock price.

Journal

Applied Mathematics and OptimizationSpringer Journals

Published: Mar 1, 1997

References

  • Critical Stock Price Near Expiration
    Barles, G.; Burdeau, J.; Romano, M.; Samsoen, N.

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