TY - JOUR
T1 - American Derivatives in Dry Markets
AU - Lacerda, Ana
AU - Amaro de Matos, Joao
PY - 2008/3
Y1 - 2008/3
N2 - This paper studies the impact of dry markets for underlying assets on the pricing and optimal exercise of American derivatives. Dry markets are characterized by the possibility of non-existence of trading at certain dates. Such non-existence may be deterministic or probabilistic. Using superreplicating strategies, we derive expectation representations for the range of arbitrage-free values of the derivatives. In the probabilistic case, if we consider an enlarged filtration induced by the price process and the market existence process, ordinary stopping times are required. If not, randomized stopping times are required. Several comparisons of the ranges obtained with the two market restrictions are performed. Finally, we conclude that market incompleteness delays the optimal exercise of American derivatives, although there may exist moments when there is indifference between exercising and selling the American derivative
AB - This paper studies the impact of dry markets for underlying assets on the pricing and optimal exercise of American derivatives. Dry markets are characterized by the possibility of non-existence of trading at certain dates. Such non-existence may be deterministic or probabilistic. Using superreplicating strategies, we derive expectation representations for the range of arbitrage-free values of the derivatives. In the probabilistic case, if we consider an enlarged filtration induced by the price process and the market existence process, ordinary stopping times are required. If not, randomized stopping times are required. Several comparisons of the ranges obtained with the two market restrictions are performed. Finally, we conclude that market incompleteness delays the optimal exercise of American derivatives, although there may exist moments when there is indifference between exercising and selling the American derivative
U2 - 10.2139/ssrn.1101556
DO - 10.2139/ssrn.1101556
M3 - Article
SN - 1556-5068
JO - SSRN Electronic Journal
JF - SSRN Electronic Journal
ER -