Title :
American options in regime-switching Lévy models with non-semibounded stochastic interest rates
Author :
Boyarchenko, Svetlana ; Levendorskiî, Sergei
Author_Institution :
Dept. of Econ., Texas Univ., Austin, TX
Abstract :
A general numerical method for pricing American options in regime-switching jump-diffusion models of stock dynamics with stochastic interest rates and/or volatility is developed. Time derivative and infinitesimal generator of the process for factors that determine the dynamics of the interest rate and/or volatility are discretized. The result is a sequence of embedded perpetual options in a Markov-modulated Levy model. Options in this sequence are solved using an iteration method based on the Wiener-Hopf factorization. Contrary to the earlier version of the method, the interest rate may assume non-positive values. As applications, explicit algorithms for Vasicek and Black´s models with jumps are derived. Numerical examples show that the option prices in these two models are very close.
Keywords :
Markov processes; iterative methods; pricing; Markov-modulated Levy model; Wiener-Hopf factorization; general numerical method; iteration method; nonsemibounded stochastic interest rates; regime-switching Levy models; stock dynamics; Economic indicators; Finite difference methods; Integral equations; Kernel; Pricing; Stochastic processes;
Conference_Titel :
American Control Conference, 2008
Conference_Location :
Seattle, WA
Print_ISBN :
978-1-4244-2078-0
Electronic_ISBN :
0743-1619
DOI :
10.1109/ACC.2008.4586626