• norsk
    • English
  • English 
    • norsk
    • English
  • Login
View Item 
  •   Home
  • Norges Handelshøyskole
  • Department of Business and Management Science
  • Discussion papers (FOR)
  • View Item
  •   Home
  • Norges Handelshøyskole
  • Department of Business and Management Science
  • Discussion papers (FOR)
  • View Item
JavaScript is disabled for your browser. Some features of this site may not work without it.

The perpetual American put option for jump-diffusions : implications for equity premiums

Aase, Knut K.
Working paper
Thumbnail
View/Open
aase knut k 1904.pdf (354.8Kb)
URI
http://hdl.handle.net/11250/163725
Date
2004-12
Metadata
Show full item record
Collections
  • Discussion papers (FOR) [509]
Abstract
In this paper we solve an optimal stopping problem with an infinite time horizon, when the state variable follows a jump-diffusion. Under certain conditions our solution can be interpreted as the price of an American perpetual put option, when the underlying asset follows this type of process.

The probability distribution under the risk adjusted measure turns out to depend on the equity premium, which is not the case for the standard, continuous version. This difference is utilized to find intertemporal, equilibrium equity premiums.

We apply this technique to the US equity data of the last century, and find an indication that the risk premium on equity was about two and a half per cent if the risk free short rate was around one per cent. On the other hand, if the latter rate was about four per cent, we similarly find that this corresponds to an equity premium of around four and a half per cent.

The advantage with our approach is that we need only equity data and option pricing theory, no consumption data was necessary to arrive at these conclusions.

Various market models are studied at an increasing level of complexity, ending with the incomplete model in the last part of the paper.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2004:19

Contact Us | Send Feedback

Privacy policy
DSpace software copyright © 2002-2019  DuraSpace

Service from  Unit
 

 

Browse

ArchiveCommunities & CollectionsBy Issue DateAuthorsTitlesSubjectsDocument TypesJournalsThis CollectionBy Issue DateAuthorsTitlesSubjectsDocument TypesJournals

My Account

Login

Statistics

View Usage Statistics

Contact Us | Send Feedback

Privacy policy
DSpace software copyright © 2002-2019  DuraSpace

Service from  Unit