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Pricing American Options under the Constant Elasticity of Variance Model and Subject to Bankruptcy

Published online by Cambridge University Press:  01 October 2009

João Pedro Vidal Nunes
João Pedro Vidal Nunes*
Affiliation:
ISCTE Business School, Complexo INDEG/ISCTE, Av. Prof. Aníbal Bettencourt, 1600-189 Lisboa, Portugal. [email protected]
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Abstract

This paper proposes an alternative characterization of the early exercise premium that is valid for any Markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary. This new representation is shown to provide the best pricing alternative available in the literature for medium- and long-term American option contracts, under the constant elasticity of variance model. Moreover, the proposed pricing methodology is also extended easily to the valuation of American options on defaultable equity and possesses appropriate asymptotic properties.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 5 , October 2009 , pp. 1231 - 1263
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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