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dc.contributor.authorZakamouline, Valeri I.
dc.date.accessioned2006-07-13T08:53:04Z
dc.date.available2006-07-13T08:53:04Z
dc.date.issued2003-10
dc.identifier.issn1500-4066
dc.identifier.urihttp://hdl.handle.net/11250/163735
dc.description.abstractIn this paper we examine the problem of finding investors’ reservation option prices and corresponding early exercise policies of American-style options in the market with proportional transaction costs using the utility based approach proposed by Davis and Zariphopoulou (1995). We present a model, where investors have a CARA utility, and derive some properties of reservation option prices. We discuss the numerical algorithm and propose a new formulation of the problem in terms of quasi-variational HJB inequalities. Based on our formulation, we suggest original discretization schemes for computing reservation prices of American-style option. The discretization schemes are then implemented for computing prices of American put and call options. We examine the effects on the reservation option prices and the corresponding early exercise policies of varying the investor’s ARA and the level of transaction costs. We find that in the market with transaction costs the holder of an American-style option exercises this option earlier as compared to the case with no transaction costs. This phenomenon concerns both put and call options written on a non-dividend paying stock. The higher level the transaction costs is, or the higher risk avers the option holder is, the earlier an American option is exercised.en
dc.format.extent398509 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoengen
dc.publisherNorwegian School of Economics and Business Administration. Department of Finance and Management Scienceen
dc.relation.ispartofseriesDiscussion paperen
dc.relation.ispartofseries2003:15en
dc.subjectoption pricingen
dc.subjecttransaction costsen
dc.subjectstochastic controlen
dc.subjectoptimal stoppingen
dc.subjectMarkov chain approximationen
dc.titleAmerican option pricing with transaction costsen
dc.typeWorking paperen


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