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Dispensing with optimal control: a new approach for the pricing and management of share buyback contracts

Author

Listed:
  • Bastien Baldacci
  • Philippe Bergault
  • Olivier Gu'eant

Abstract

This paper introduces a novel methodology for the pricing and management of share buyback contracts, overcoming the limitations of traditional optimal control methods, which frequently encounter difficulties with high-dimensional state spaces and the intricacies of selecting appropriate risk penalty or risk aversion parameter. Our methodology applies optimized heuristic strategies to maximize the contract's value. The computation of this value utilizes classical methods typically used for pricing path-dependent options. Additionally, our approach naturally leads to the formulation of a $\Delta$-hedging strategy and disentangles therefore the repurchase strategy from the hedging of the payoff.

Suggested Citation

  • Bastien Baldacci & Philippe Bergault & Olivier Gu'eant, 2024. "Dispensing with optimal control: a new approach for the pricing and management of share buyback contracts," Papers 2404.13754, arXiv.org, revised Jul 2024.
    • Handle: RePEc:arx:papers:2404.13754
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    References listed on IDEAS

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    1. Olivier Guéant & Jiang Pu & Guillaume Royer, 2015. "Accelerated Share Repurchase: Pricing And Execution Strategy," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 1-31.
    2. Olivier Guéant & Iuliia Manziuk & Jiang Pu, 2020. "Accelerated share repurchase and other buyback programs: what neural networks can bring," Quantitative Finance, Taylor & Francis Journals, vol. 20(8), pages 1389-1404, August.
    3. Mohamed Hamdouche & Pierre Henry-Labordere & Huyên Pham, 2022. "Policy Gradient Learning Methods for Stochastic Control with Exit Time and Applications to Share Repurchase Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 29(6), pages 439-456, November.
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