Pricing early exercise contracts in incomplete markets

A. Oberman () and T. Zariphopoulou ()

Computational Management Science, 2003, vol. 1, issue 1, 75-107

Abstract: We present a utility-based methodology for the valuation of early exercise contracts in incomplete markets. Incompleteness stems from nontraded assets on which the contracts are written. This methodology takes into account the individual’s attitude towards risk and yields nonlinear pricing rules. The early exercise indifference prices solve a quasilinear variational inequality with an obstacle term. They are also shown to satisfy an optimal stopping problem with criterion given by their European indifference price counterpart. A class of numerical schemes are developed for the variational inequalities and a general approach for solving numerically nonlinear equations arising in incomplete markets is discussed. Copyright Springer-Verlag Berlin/Heidelberg 2003

Keywords: Nontraded assets; early exercise contracts; utility maximization with discretionary stopping; Hamilton-Jacobi-Bellman equations; quasilinear variational inequalities; nonlinear asset pricing (search for similar items in EconPapers)
Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10287-003-0005-2 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:comgts:v:1:y:2003:i:1:p:75-107

Ordering information: This journal article can be ordered from
http://www.springer. ... ch/journal/10287/PS2

DOI: 10.1007/s10287-003-0005-2

Access Statistics for this article

Computational Management Science is currently edited by Ruediger Schultz

More articles in Computational Management Science from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().