Analytical Pricing of American Bond Options in the Heath-Jarrow-Morton Model

Maria B. Chiarolla and Tiziano De Angelis

Papers from arXiv.org

Abstract: We study the optimal stopping problem of pricing an American Put option on a Zero Coupon Bond (ZCB) in the Musiela's parametrization of the Heath-Jarrow-Morton (HJM) model for forward interest rates. First we show regularity properties of the price function by probabilistic methods. Then we find an infinite dimensional variational formulation of the pricing problem by approximating the original optimal stopping problem by finite dimensional ones, after a suitable smoothing of the payoff. As expected, the first time the price of the American bond option equals the payoff is shown to be optimal.

Date: 2012-12, Revised 2014-03
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Published in Stochastic Processes and their Applications 125 (2015) 678-707

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1212.0781

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