Rationality Parameter for Exercising American Put
AbstractIn 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. View Full-Text
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Gad, K.S.T.; Pedersen, J.L. Rationality Parameter for Exercising American Put. Risks 2015, 3, 103-111.
Gad KST, Pedersen JL. Rationality Parameter for Exercising American Put. Risks. 2015; 3(2):103-111.Chicago/Turabian Style
Gad, Kamille S.T.; Pedersen, Jesper L. 2015. "Rationality Parameter for Exercising American Put." Risks 3, no. 2: 103-111.