dorsal/arxiv
View SchemaVolatility and dividend risk in perpetual American options
| Authors | Miquel Montero |
|---|---|
| Categories | |
| ArXiv ID | physics/0610047 |
| URL | https://arxiv.org/abs/physics/0610047 |
| DOI | 10.1088/1742-5468/2007/04/P04002 |
| Journal | J. Stat. Mech. (2007) P04002 |
Abstract
American options are financial instruments that can be exercised at any time before expiration. In this paper we study the problem of pricing this kind of derivatives within a framework in which some of the properties --volatility and dividend policy-- of the underlaying stock can change at a random instant of time, but in such a way that we can forecast their final values. Under this assumption we can model actual market conditions because some of the most relevant facts that may potentially affect a firm will entail sharp predictable effects. We will analyse the consequences of this potential risk on perpetual American derivatives, a topic connected with a wide class of recurrent problems in physics: holders of American options must look for the fair price and the optimal exercise strategy at once, a typical question of free absorbing boundaries. We present explicit solutions to the most common contract specifications and derive analytical expressions concerning the mean and higher moments of the exercise time.
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"abstract": "American options are financial instruments that can be exercised at any time\nbefore expiration. In this paper we study the problem of pricing this kind of\nderivatives within a framework in which some of the properties --volatility and\ndividend policy-- of the underlaying stock can change at a random instant of\ntime, but in such a way that we can forecast their final values. Under this\nassumption we can model actual market conditions because some of the most\nrelevant facts that may potentially affect a firm will entail sharp predictable\neffects. We will analyse the consequences of this potential risk on perpetual\nAmerican derivatives, a topic connected with a wide class of recurrent problems\nin physics: holders of American options must look for the fair price and the\noptimal exercise strategy at once, a typical question of free absorbing\nboundaries. We present explicit solutions to the most common contract\nspecifications and derive analytical expressions concerning the mean and higher\nmoments of the exercise time.",
"arxiv_id": "physics/0610047",
"authors": [
"Miquel Montero"
],
"categories": [
"physics.soc-ph",
"q-fin.PR",
"q-fin.RM",
"q-fin.ST"
],
"doi": "10.1088/1742-5468/2007/04/P04002",
"journal_ref": "J. Stat. Mech. (2007) P04002",
"title": "Volatility and dividend risk in perpetual American options",
"url": "https://arxiv.org/abs/physics/0610047"
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