Reflected Backward Stochastic Differential Equations for a Finite State Markov Chain Model and Applications to American Options
Probability
2015-05-14 v5
Abstract
In this paper, we introduce a new kind of reflected backward stochastic differential equations (RBSDEs) driven by a martingale, in a Markov chain model, but not driven by Brownian motion, and give existence and uniqueness results for the new equations. Then we discuss American options in a finite state Markov chain model, in the presence of a stochastic discount function (SDF) and using the theory of the new RBSDEs. We show that there exists a constrained super-hedging strategy for an American option, which is unique in our framework as the solution to an RBSDE.
Keywords
Cite
@article{arxiv.1404.2218,
title = {Reflected Backward Stochastic Differential Equations for a Finite State Markov Chain Model and Applications to American Options},
author = {Dimbinirina Ramarimbahoaka and Zhe Yang and Robert J. Elliott},
journal= {arXiv preprint arXiv:1404.2218},
year = {2015}
}
Comments
33 pages