AMERICAN OPTIONS AND INCOMPLETE INFORMATION

Erik Ekström and Martin Vannestål
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Erik Ekström: Department of Mathematics, Uppsala University, Box 480, 75106 Uppsala, Sweden

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 06, 1-14

Abstract: We study the optimal exercise of American options under incomplete information about the drift of the underlying process, and we show that quite unexpected phenomena may occur. In fact, certain parameter values give rise to stopping regions very different from the standard case of complete information. For example, we show that for the American put (call) option it is sometimes optimal to exercise the option when the underlying process reaches an upper (lower) boundary.

Keywords: American options; incomplete information; optimal stopping; filtering theory (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0219024919500353

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