Pricing American Options under the Constant Elasticity of Variance Model and Subject to Bankruptcy

João Pedro Vidal Nunes

Journal of Financial and Quantitative Analysis, 2009, vol. 44, issue 5, 1231-1263

Abstract: This paper proposes an alternative characterization of the early exercise premium that is valid for any Markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary. This new representation is shown to provide the best pricing alternative available in the literature for medium- and long-term American option contracts, under the constant elasticity of variance model. Moreover, the proposed pricing methodology is also extended easily to the valuation of American options on defaultable equity and possesses appropriate asymptotic properties.

Date: 2009
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