Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/167848
Authors: 
Gad, Kamille Sofie Tågholt
Pedersen, Jesper Lund
Year of Publication: 
2015
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 3 [Year:] 2015 [Issue:] 2 [Pages:] 103-111
Abstract: 
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.
Subjects: 
behavioral modeling
irrational exercise rule
partial differential equation
penalty method
Persistent Identifier of the first edition: 
Creative Commons License: 
http://creativecommons.org/licenses/by/4.0/
Document Type: 
Article
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