Cookies?
Library Header Image
LSE Research Online LSE Library Services

Perpetual American standard and lookback options with event risk and asymmetric information

Gapeev, Pavel V. and Li, Libo (2022) Perpetual American standard and lookback options with event risk and asymmetric information. SIAM Journal on Financial Mathematics. ISSN 1945-497X (In Press)

[img] Text (DefaultM71b-Revision-v1b) - Accepted Version
Available under License Creative Commons Attribution.

Download (569kB)

Abstract

We derive closed-form solutions to the perpetual American standard and lookback put and call options in an extension of the Black-Merton-Scholes model with event risk and incomplete information. It is assumed that the contracts are terminated with linear recoveries at the last hitting times for the underlying asset price process of its running maximum or minimum over the infinite time interval which are not stopping times with respect to the observable filtration. We show that the optimal exercise times are the first times at which the asset price reaches some lower or upper stochastic boundaries depending on the current values of its running maximum or minimum. The proof is based on the reduction of the original optimal stopping problems to the associated free-boundary problems and the solution of the latter problems by means of the smooth-fit and normalreflection conditions. The optimal exercise boundaries are proven to be the maximal or minimal solutions of some first-order nonlinear ordinary differential equations.

Item Type: Article
Official URL: https://www.siam.org/publications/journals/siam-jo...
Additional Information: © 2021 The Authors
Divisions: Mathematics
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Q Science > QA Mathematics
Date Deposited: 25 Apr 2022 09:45
Last Modified: 25 Apr 2022 12:24
URI: http://eprints.lse.ac.uk/id/eprint/114940

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics