A Discrete Time Valuation of Callable Financial Securities with Regime Switches

Kimitoshi Sato, Katsushige Sawaki

Abstract

In this paper, we consider a model of valuing callable financial securities when the underlying asset price dynamic is modeled by a regime switching process. The callable securities enable both an issuer and an investor to exercise their rights to call. We show that such a model can be formulated as a coupled stochastic game for the optimal stopping problem with two sopping boundaries. We provide analytical results of optimal stopping rules of the issuer and the investor under general payoff functions defined on the underlying asset price, the state of the economy and the time. In particular, we derive specific stopping boundaries for the both players by specifying for the callable securities to be the callable American call and put options. Also, numerical examples are presented to investigate the impact of parameters on the value function as well as on the optimal stopping rules.

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Paper Citation


in Harvard Style

Sato K. and Sawaki K. (2013). A Discrete Time Valuation of Callable Financial Securities with Regime Switches . In Proceedings of the 2nd International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES, ISBN 978-989-8565-40-2, pages 225-229. DOI: 10.5220/0004201402250229


in Bibtex Style

@conference{icores13,
author={Kimitoshi Sato and Katsushige Sawaki},
title={A Discrete Time Valuation of Callable Financial Securities with Regime Switches},
booktitle={Proceedings of the 2nd International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,},
year={2013},
pages={225-229},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0004201402250229},
isbn={978-989-8565-40-2},
}


in EndNote Style

TY - CONF
JO - Proceedings of the 2nd International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,
TI - A Discrete Time Valuation of Callable Financial Securities with Regime Switches
SN - 978-989-8565-40-2
AU - Sato K.
AU - Sawaki K.
PY - 2013
SP - 225
EP - 229
DO - 10.5220/0004201402250229