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2019•International Journal of Theoretical and Applied FinanceRequires access

AMERICAN OPTIONS AND INCOMPLETE INFORMATION

Erik Ekström, Martin Vannestål

Open publisher page 12 citations

Abstract

We study the optimal exercise of American options under incomplete information about the drift of the underlying process, and we show that quite unexpected phenomena may occur. In fact, certain parameter values give rise to stopping regions very different from the standard case of complete information. For example, we show that for the American put (call) option it is sometimes optimal to exercise the option when the underlying process reaches an upper (lower) boundary.

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What this paper is about

We study the optimal exercise of American options under incomplete information about the drift of the underlying process, and we show that quite unexpected phenomena may occur. In fact, certain parameter values give rise to stopping regions very different from the standard case of complete information. For example, we show that for the American put (call) option it is sometimes optimal to exercise the option when the underlying process reaches an upper (lower) boundary.

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OpenAlex reports 12 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

We study the optimal exercise of American options under incomplete information about the drift of the underlying process, and we show that quite unexpected phenomena may occur. In fact, certain parameter values give rise to stopping regions very different from the standard case of complete information. For example, we show that for the American put (call) option it is sometimes optimal to exercise the option when the underlying process reaches an upper (lower) boundary.

Key concepts: Optimal stopping, Complete information, Put option, Boundary (topology), Process (computing), Mathematical economics, Upper and lower bounds, Computer science

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