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Authors: Kimitoshi Sato 1 and Katsushige Sawaki 2

Affiliations: 1 Waseda University, Japan ; 2 Nanzan University, Japan

Keyword(s): Optimal stopping; Game option; Markov chain; Regime switching; Callable securities; Stopping boundaries

Related Ontology Subjects/Areas/Topics: Dynamic Programming ; Methodologies and Technologies ; Operational Research ; Optimization in Finance ; Stochastic Processes

Abstract: In this paper, we consider a model of valuing callable financial securities when the underlying asset price dynamic is modeled by a regime switching process. The callable securities enable both an issuer and an investor to exercise their rights to call. We show that such a model can be formulated as a coupled stochastic game for the optimal stopping problem with two sopping boundaries. We provide analytical results of optimal stopping rules of the issuer and the investor under general payoff functions defined on the underlying asset price, the state of the economy and the time. In particular, we derive specific stopping boundaries for the both players by specifying for the callable securities to be the callable American call and put options. Also, numerical examples are presented to investigate the impact of parameters on the value function as well as on the optimal stopping rules.

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Paper citation in several formats:
Sato, K. and Sawaki, K. (2013). A Discrete Time Valuation of Callable Financial Securities with Regime Switches. In Proceedings of the 2nd International Conference on Operations Research and Enterprise Systems - ICORES; ISBN 978-989-8565-40-2; ISSN 2184-4372, SciTePress, pages 225-229. DOI: 10.5220/0004201402250229

@conference{icores13,
author={Kimitoshi Sato. and Katsushige Sawaki.},
title={A Discrete Time Valuation of Callable Financial Securities with Regime Switches},
booktitle={Proceedings of the 2nd International Conference on Operations Research and Enterprise Systems - ICORES},
year={2013},
pages={225-229},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0004201402250229},
isbn={978-989-8565-40-2},
issn={2184-4372},
}

TY - CONF

JO - Proceedings of the 2nd International Conference on Operations Research and Enterprise Systems - ICORES
TI - A Discrete Time Valuation of Callable Financial Securities with Regime Switches
SN - 978-989-8565-40-2
IS - 2184-4372
AU - Sato, K.
AU - Sawaki, K.
PY - 2013
SP - 225
EP - 229
DO - 10.5220/0004201402250229
PB - SciTePress