Reference : Early exercise decision in american options with dividends, stochastic volatility, an...
Scientific journals : Article
Business & economic sciences : Finance
Finance
http://hdl.handle.net/10993/40496
Early exercise decision in american options with dividends, stochastic volatility, and jumps
English
Cosma, Antonio mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >]
Galluccio, Stefano []
Pederzoli, Paola mailto [University of Houston Bauer College of Business]
Scaillet, Olivier mailto [University of Geneva and Swis Finance Institute]
2019
Journal of Financial and Quantitative Analysis
Cambridge University Press
0
0
1-26
Yes
International
0022-1090
United Kingdom
[en] Using a fast numerical technique, we investigate a large database of investors' suboptimal nonexercise of short-maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modeling of the discrete dividend is essential for a correct calculation of the early exercise boundary, as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black--Scholes--Merton benchmark cuts the amount lost by investors through suboptimal exercise by one-quarter. The remaining three-quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise.
Researchers
http://hdl.handle.net/10993/40496
10.1017/S0022109018001229

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