American options in a multi-asset market model with proportional transaction costs are studied in the case when the holder of an option is able to exercise it gradually at a so-called mixed (randomized) stopping time. The introduction of gradual exercise leads to tighter bounds on the option price when compared to the case studied in the existing literature, where the standard assumption is that the option can only be exercised instantly at an ordinary stopping time. Algorithmic constructions for the bid and ask prices and the associated superhedging strategies and optimal mixed stopping times for an American option with gradual exercise are developed and implemented, and dual representations are established.
|Number of pages||36|
|Journal||International Journal of Theoretical and Applied Finance|
|Early online date||26 Dec 2014|
|Publication status||Published - Dec 2014|
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- American options
- transaction costs
- mixed stopping times
- dual representation