Article (Scientific journals)
Early exercise decision in american options with dividends, stochastic volatility, and jumps
Cosma, Antonio; Galluccio, Stefano; Pederzoli, Paola et al.
2020In Journal of Financial and Quantitative Analysis, 55 (1), p. 331-356
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Abstract :
[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.
Disciplines :
Finance
Author, co-author :
Cosma, Antonio ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Galluccio, Stefano
Pederzoli, Paola;  University of Houston Bauer College of Business
Scaillet, Olivier;  University of Geneva and Swis Finance Institute
External co-authors :
yes
Language :
English
Title :
Early exercise decision in american options with dividends, stochastic volatility, and jumps
Publication date :
February 2020
Journal title :
Journal of Financial and Quantitative Analysis
ISSN :
0022-1090
Publisher :
Cambridge University Press, United Kingdom
Volume :
55
Issue :
1
Pages :
331-356
Peer reviewed :
Peer Reviewed verified by ORBi
Focus Area :
Finance
Available on ORBilu :
since 24 September 2019

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