The Valuation of American Options with Stochastic Stopping Time Constraints

Daniel Egloff and Markus Leippold ()

Applied Mathematical Finance, 2009, vol. 16, issue 3, 287-305

Abstract: This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi et al., we transform the constrained into an unconstrained optimal stopping problem. The transformation replaces the original payoff by the value of a generalized barrier option. We also provide a Monte Carlo method to numerically calculate the option value for multidimensional Markov processes. We adapt the Longstaff-Schwartz algorithm to solve the stochastic Cauchy-Dirichlet problem related to the valuation problem of the barrier option along a set of simulated trajectories of the underlying Markov process.

Keywords: American options; optimal stopping under constraints; Feller process; out-performance options; management options; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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DOI: 10.1080/13504860802645706

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