American option prices in a Markov chain market model

John van der Hoek · Robert James Elliott

24 citations0/0 files storedApplied Stochastic Models in Business and Industry

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Stochastic processes and financial applications Capital Investment and Risk Analysis Risk and Portfolio Optimization

Abstract

Abstract This paper is a sequel to our previous paper ‘A New Paradigm in Asset Pricing’ in which we construct a model for asset pricing in a world where the randomness is modeled by a Markov chain. In this paper we develop a theory of optimal stopping and related variational inequalities for American options in this model. A version of Saigal's Lemma is established and numerical results obtained. Copyright © 2011 John Wiley & Sons, Ltd.

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1979Option pricing: A simplified approach 1997The Econometrics of Financial Markets 2001Valuing American Options by Simulation: A Simple Least-Squares Approach 1987Efficient Analytic Approximation of American Option Values 1984The American Put Option Valued Analytically 2005Asset Pricing: Revised Edition 2001Regression methods for pricing complex American-style options 1990The Analytic Valuation of American Options

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2012Asset Pricing Using Finite State Markov Chain Stochastic Discount Functions

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