A Comparison of Iterated Optimal Stopping and Local Policy Iteration for American Options Under Regime Switching

2013 ◽  
Vol 58 (2) ◽  
pp. 409-430 ◽  
Author(s):  
J. Babbin ◽  
P. A. Forsyth ◽  
G. Labahn
Keyword(s):  
Optimal Stopping ◽  
Regime Switching ◽  
American Options ◽  
Policy Iteration ◽  
Local Policy

scholarly journals An Analytic Approach for Pricing American Options with Regime Switching

2021 ◽  
Vol 14 (5) ◽  
pp. 188
Author(s):  
Leunglung Chan ◽  
Song-Ping Zhu
Keyword(s):  
Regime Switching ◽  
American Options ◽  
Option Price ◽  
Switching Model ◽  
Homotopy Analysis ◽  
State Regime ◽  
Markov Modulated ◽  
Appreciation Rate ◽  
The Interest Rate ◽  
Hidden States

This paper investigates the American option price in a two-state regime-switching model. The dynamics of underlying are driven by a Markov-modulated Geometric Wiener process. That means the interest rate, the appreciation rate, and the volatility of underlying rely on hidden states of the economy which can be interpreted in terms of Markov chains. By means of the homotopy analysis method, an explicit formula for pricing two-state regime-switching American options is presented.

scholarly journals Optimal Surrender Policy of Guaranteed Minimum Maturity Benefits in Variable Annuities with Regime-Switching Volatility

2021 ◽  
Vol 2021 ◽  
pp. 1-20
Author(s):  
Xiankang Luo ◽  
Jie Xing
Keyword(s):  
Optimal Stopping ◽  
Mutual Fund ◽  
Regime Switching ◽  
Probabilistic Methods ◽  
Optimal Stopping Problem ◽  
American Option Pricing ◽  
Volterra Type ◽  
Variable Annuities ◽  
Type Integral ◽  
Tree Method

This study investigates valuation of guaranteed minimum maturity benefits (GMMB) in variable annuity contract in the case where the guarantees can be surrendered at any time prior to the maturity. In the event of the option being exercised early, early surrender charges will be applied. We model the underlying mutual fund dynamics under regime-switching volatility. The valuation problem can be reduced to an American option pricing problem, which is essentially an optimal stopping problem. Then, we obtain the pricing partial differential equation by a standard Markovian argument. A detailed discussion shows that the solution of the problem involves an optimal surrender boundary. The properties of the optimal surrender boundary are given. The regime-switching Volterra-type integral equation of the optimal surrender boundary is derived by probabilistic methods. Furthermore, a sensitivity analysis is performed for the optimal surrender decision. In the end, we adopt the trinomial tree method to determine the optimal strategy.

scholarly journals On optimal stopping of risk processes with regime switching

2012 ◽  
Vol 45 (2) ◽  
Author(s):  
Elżbieta Ferenstein ◽  
Adam Pasternak-Winiarski
Keyword(s):  
Optimal Stopping ◽  
Regime Switching ◽  
Random Variable ◽  
Risk Process ◽  
Stopping Rules ◽  
Process Change ◽  
Programming Methodology ◽  
Finite Set ◽  
Alternative Settings ◽  
Risk Processes

AbstractIn the paper we solve a problem of optimal stopping of a risk process in two alternative settings. We assume that the main characteristics of the risk process change according to unobservable random variable. In the first model we assume that the post-disorder distributions are not known a’priori and are randomly chosen from a finite set of admissible distributions. The second model concentrates on a situation when more than one disorder is possible. For both models optimal stopping rules with respect to given utility function are constructed using dynamic programming methodology.

Sign in / Sign up

Export Citation Format

Share Document