[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