Rationality Parameter for Exercising American Put
In this paper, irrational exercise behavior of the buyer of an American put is characterized by a single parameter. We model irrational exercise rules as the first jump time of a point processes with stochastic intensity. By the rationality parameter, we parameterize a family of stochastic intensiti...
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| Format: | Article |
| Language: | English |
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MDPI AG
2015-05-01
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| Series: | Risks |
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| Online Access: | http://www.mdpi.com/2227-9091/3/2/103 |
| _version_ | 1818987112578416640 |
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| author | Kamille Sofie Tågholt Gad Jesper Lund Pedersen |
| author_facet | Kamille Sofie Tågholt Gad Jesper Lund Pedersen |
| author_sort | Kamille Sofie Tågholt Gad |
| collection | DOAJ |
| description | In this paper, irrational exercise behavior of the buyer of an American put is characterized by a single parameter. We model irrational exercise rules as the first jump time of a point processes with stochastic intensity. By the rationality parameter, we parameterize a family of stochastic intensities that depends on the value of the put itself. We present a probabilistic proof that the value of the American put using the irrational exercise rule converges to the arbitrage-free price as the rationality parameter converges to infinity. Another application of this result is the penalty method for approximating the price of an American put. |
| first_indexed | 2024-12-20T19:01:31Z |
| format | Article |
| id | doaj.art-a8f4bc469e8b4168a27e881b6218ba71 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-12-20T19:01:31Z |
| publishDate | 2015-05-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-a8f4bc469e8b4168a27e881b6218ba712022-12-21T19:29:22ZengMDPI AGRisks2227-90912015-05-013210311110.3390/risks3020103risks3020103Rationality Parameter for Exercising American PutKamille Sofie Tågholt Gad0Jesper Lund Pedersen1Department of Mathematical Sciences, University of Copenhagen, Universitetsparken 5, 2100 Copenhagen, DenmarkDepartment of Mathematical Sciences, University of Copenhagen, Universitetsparken 5, 2100 Copenhagen, DenmarkIn this paper, irrational exercise behavior of the buyer of an American put is characterized by a single parameter. We model irrational exercise rules as the first jump time of a point processes with stochastic intensity. By the rationality parameter, we parameterize a family of stochastic intensities that depends on the value of the put itself. We present a probabilistic proof that the value of the American put using the irrational exercise rule converges to the arbitrage-free price as the rationality parameter converges to infinity. Another application of this result is the penalty method for approximating the price of an American put.http://www.mdpi.com/2227-9091/3/2/103behavioral modelingirrational exercise rulepartial differential equationpenalty method |
| spellingShingle | Kamille Sofie Tågholt Gad Jesper Lund Pedersen Rationality Parameter for Exercising American Put Risks behavioral modeling irrational exercise rule partial differential equation penalty method |
| title | Rationality Parameter for Exercising American Put |
| title_full | Rationality Parameter for Exercising American Put |
| title_fullStr | Rationality Parameter for Exercising American Put |
| title_full_unstemmed | Rationality Parameter for Exercising American Put |
| title_short | Rationality Parameter for Exercising American Put |
| title_sort | rationality parameter for exercising american put |
| topic | behavioral modeling irrational exercise rule partial differential equation penalty method |
| url | http://www.mdpi.com/2227-9091/3/2/103 |
| work_keys_str_mv | AT kamillesofietagholtgad rationalityparameterforexercisingamericanput AT jesperlundpedersen rationalityparameterforexercisingamericanput |