AMERICAN OPTION VALUATION UNDER CONTINUOUS-TIME MARKOV CHAINS

作者：Eriksson B^*; Pistorius M R

来源：Advances in Applied Probability, 2015, 47(2): 378-401.

DOI：10.1017/s0001867800007904

• Markov chain
• American option
• free-boundary problem
• optimal stopping
• Feller process
• numerical approximation

This paper is concerned with the solution of the optimal stopping problem associated to the value of American options driven by continuous-time Markov chains. The value-function of an American option in this setting is characterised as the unique solution (in a distributional sense) of a system of variational inequalities. Furthermore, with continuous and smooth fit principles not applicable in this discrete state-space setting, a novel explicit characterisation is provided of the optimal stopping boundary in terms of the generator of the underlying Markov chain. Subsequently, an algorithm is presented for the valuation of American options under Markov chain models. By application to a suitably chosen sequence of Markov chains, the algorithm provides an approximate valuation of an American option under a class of Markov models that includes diffusion models, exponential Levy models, and stochastic differential equations driven by Levy processes. Numerical experiments for a range of different models suggest that the approximation algorithm is flexible and accurate. A proof of convergence is also provided.

• 出版日期2015-6