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American option prices in a Markov chain market model

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Abstract

This paper is a sequel to our previous paper ‘A New Paradigm in Asset Pricing’ in which we construct a model for asset pricing in a world where the randomness is modeled by a Markov chain. In this paper we develop a theory of optimal stopping and related variational inequalities for American options in this model. A version of Saigal's Lemma is established and numerical results obtained. Copyright © 2011 John Wiley & Sons, Ltd.

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