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American Options And Incomplete Information

Author

Listed:
  • ERIK EKSTRÖM

    (Department of Mathematics, Uppsala University, Box 480, 75106 Uppsala, Sweden)

  • MARTIN VANNESTÅL

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.

Suggested Citation

  • Erik Ekström & Martin Vannestål, 2019. "American Options And Incomplete Information," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(06), pages 1-14, September.
    • Handle: RePEc:wsi:ijtafx:v:22:y:2019:i:06:n:s0219024919500353
    DOI: 10.1142/S0219024919500353
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    References listed on IDEAS

    as
    1. Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2005. "Investment Timing Under Incomplete Information," Mathematics of Operations Research, INFORMS, vol. 30(2), pages 472-500, May.
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    3. Pavel V. Gapeev, 2012. "Pricing Of Perpetual American Options In A Model With Partial Information," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(01), pages 1-21.
    4. Lakner, Peter, 1995. "Utility maximization with partial information," Stochastic Processes and their Applications, Elsevier, vol. 56(2), pages 247-273, April.
    5. Pavel V. Gapeev, 2012. "Pricing Of Perpetual American Options In A Model With Partial Information," World Scientific Book Chapters, in: Matheus R Grasselli & Lane P Hughston (ed.), Finance at Fields, chapter 14, pages 327-347, World Scientific Publishing Co. Pte. Ltd..
    6. Bing Lu, 2013. "Optimal Selling of an Asset with Jumps Under Incomplete Information," Applied Mathematical Finance, Taylor & Francis Journals, vol. 20(6), pages 599-610, December.
    7. Manuel Klein, 2009. "Comment on “Investment Timing Under Incomplete Information”," Mathematics of Operations Research, INFORMS, vol. 34(1), pages 249-254, February.
    8. Stephane Villeneuve, 1999. "Exercise regions of American options on several assets," Finance and Stochastics, Springer, vol. 3(3), pages 295-322.
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    Full references (including those not matched with items on IDEAS)

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