American options: the EPV pricing model

Svetlana Boyarchenko () and Sergei Levendorskii
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Sergei Levendorskii: The University of Texas at Austin

Finance from EconWPA

Abstract: We explicitly solve the pricing problem for perpetual American puts and calls, and provide an efficient semi-explicit pricing procedure for options with finite time horizon. Contrary to the standard approach, which uses the price process as a primitive, we model the price process as the expected present value of a stream, which is a monotone function of a Levy process. Certain processes exhibiting mean-reverting, stochastic volatility and/or switching features can be modelled in this way. This specification allows us to consider assets that pay no dividends at all when the level of the underlying stochastic factor is too low, assets that pay dividends at a fixed rate when the underlying stochastic process remains in some range, or capped dividends.

Keywords: Levy processes; option pricing; dividend paying assets. (search for similar items in EconPapers)
JEL-codes: C61 D81 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2004-05-18
Note: Type of Document - pdf; pages: 19
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Journal Article: American options: the EPV pricing model (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0405024

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