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Exercise Boundary of the American Put Near Maturity in an Exponential L\'evy Model

By Damien Lamberton and Mohammed Mikou

Abstract

We study the behavior of the critical price of an American put option near maturity in the exponential L\'evy model when the underlying stock pays dividends at a continuous rate. In particular, we prove that, in situations where the limit of the critical price is equal to the stock price, the rate of convergence to the limit is linear if and only if the underlying L\'evy process has finite variation. In the case of infinite variation, a variety of rates of convergence can be observed: we prove that, when the negative part of the L\'evy measure exhibits an $\alpha$-stable density near the origin, with $1<\alpha<2$, the convergence rate is ruled by $\theta^{1/\alpha}|\ln \theta|^{1-\frac{1}{\alpha}}$, where $\theta$ is time until maturity

Topics: Quantitative Finance - Pricing of Securities, 60G40, 60G51, 91G20
Year: 2011
OAI identifier: oai:arXiv.org:1105.0284
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