Optimal exercise of American options under time-dependent Ornstein-Uhlenbeck processes
Abstrak
We study the barrier that gives the optimal time to exercise an American option written on a time-dependent Ornstein--Uhlenbeck process, a diffusion often adopted by practitioners to model commodity prices and interest rates. By framing the optimal exercise of the American option as a problem of optimal stopping and relying on probabilistic arguments, we provide a non-linear Volterra-type integral equation characterizing the exercise boundary, develop a novel comparison argument to derive upper and lower bounds for such a boundary, and prove its Lipschitz continuity in any closed interval that excludes the expiration date and, thus, its differentiability almost everywhere. We implement a Picard iteration algorithm to solve the Volterra integral equation and show illustrative examples that shed light on the boundary's dependence on the process's drift and volatility.
Penulis (3)
Abel Azze
Bernardo D'Auria
Eduardo García-Portugués
Akses Cepat
- Tahun Terbit
- 2022
- Bahasa
- en
- Sumber Database
- arXiv
- Akses
- Open Access ✓