VALUATION OF STOCK LOANS WITH REGIME SWITCHING

Journal article

This paper is concerned with stock loan valuation in which the underlying stock price is dictated by geometric Brownian motion with regime switchi ng. The stock loan pricing is quite different from that for standard American options because the associated variational inequalities may have infinitely many solutions. In addition, the optimal stopping time equals infinity with positive probability. Variational inequalities are used to establish values of stock loans and reasonable values of critical parameters such as loan sizes, loan rates, and service fees in terms of certain algebraic equations. Numerical examples are included to illustrate the results. © 2009 Society for Industrial and Applied Mathematics.

Authors: Zhang, Q; Zhou, X

• Publication status: Published
• Journal: SIAM JOURNAL ON CONTROL AND OPTIMIZATION
• Volume: 48
• Issue: 3
• Pages: 1229-1250
• Publication date: 2009-01-01
• DOI: 10.1137/070708998
• EISSN: 1095-7138
• ISSN: 0363-0129
• Language: English
• Keywords: regime switching; stock loan; optimal stopping; variational inequalities; smooth fit