American Options in the Heston Model with Stochastic Interest Rate and Its Generalizations

Abstract

We consider the Heston model with the stochastic interest rate of Cox–Ingersoll–Ross (CIR) type and more general models with stochastic volatility and interest rates depending on two CIR-factors; the price, volatility and interest rate may correlate. Time-derivative and infinitesimal generator of the process for factors that determine the dynamics of the interest rate and/or volatility are discretized. The result is a sequence of embedded perpetual options arising in the time discretization of a Markov-modulated Lévy model. Options in this sequence are solved using an iteration method based on the Wiener–Hopf factorization. Typical shapes of the early exercise boundary are shown, and good agreement of option prices with prices calculated with the Longstaff–Schwartz method and Medvedev–Scaillet asymptotic method is demonstrated.     

Stochastic impulse control with regime switching for the optimal dividend policy when there are business cycles,taxes and fixed costs

We consider the problem of finding the optimal dividend policy for a company whose cash reserve follows a Brownian motion with drift and volatility modulated by an observable finite-state continuous-time Markov chain. The Markov chain represents the regime of the economy. We allow fixed costs and taxes associated with the dividend payments. This optimization problem generates a stochastic impulse control problem with regime switching. We solve this problem and obtain the first analytical solutions for the optimal dividend policy when there are simultaneously fixed costs, taxes and business cycles. Our results show that the optimal dividend policy depends strongly on the regime of the economy, on fixed costs and on taxes.     

Stochastic Optimization Algorithms for Pricing American Put Options Under Regime-Switching Models

This work provides a Markov-modulated stochastic approximation based approach for pricing American put options under a regime-switching geometric Brownian motion market model. The solutions of pricing American options may be characterized by certain threshold values. Here, a class of Markov-modulated stochastic approximation (SA) algorithms is developed to determine the optimal threshold levels. For option pricing in a finite horizon, a SA procedure is carried out for a fixed time T. As T varies, the optimal threshold values obtained via SA trace out a curve, called the threshold frontier. Numerical experiments are reported to demonstrate the effectiveness of the approach. Our approach provides us with a viable computational tool and has advantage in terms of the reduced computational complexity compared with the variational or quasivariational inequality methods for optimal stopping.Communicated by C. T. LeondesThis research was supported in part by the National Science Foundation under Grant DMS-0304928, and in part by the National Natural Science Foundation of China under Grant 60574069.     

Regime diagram of the development of long-wave near-wall disturbances in a hypersonic boundary layer

A regime diagram of the development of slow near-wall disturbances induced by an unsteady self-induced pressure perturbation in a hypersonic boundary layer is constructed for a disturbance wavelength greater than the boundary layer thickness. It is shown that the main factors shaping the perturbed flow are the gas enthalpy near the body surface, the intensity of the viscous-inviscid interaction, and the nature (sub- or supersonic) of the main part of the boundary layer. Nonlinear boundary-value problems are formulated for regimes in which the near-wall boundary layer region plays a decisive role. Numerical and analytical solutions are obtained in the linear approximation. It is shown that intensification of the viscous-inviscid interaction or an increase in the role of the supersonic main region of the boundary layer impart generally supersonic properties to the main part of the boundary layer, i.e. the upstream propagation of the disturbances is damped and the disturbance growth downstream becomes more intense. Damping of the viscous-inviscid interaction and an increase in the role of the subsonic main part of the boundary layer have the opposite effect. Surface cooling increases the effect of the main part of the boundary layer on the formation of pressure disturbances and surface heating leads to an increase in the effect of the near-wall boundary layer region. It is also shown that for the regimes considered disturbances propagate in a direction opposite to that of the free stream from the turbulent flow region located downstream of the local disturbance development region.Translated from Izvestiya Rossiiskoi Academii Nauk, Mekhanika Zhidkosti i Gaza, No. 6, 2004, pp. 59–71. Original Russian Text Copyright © 2004 by Bogolepov and Neiland.     

Boundary-Value Problem of Drainage in a Fresh Groundwater Fringe above Saline Groundwater

A multiparameter boundary-value problem of fresh infiltration water seepage in a drained fringe above quiescent saline water is solved in the direct statement and studied in detail.     

Mathematical analysis of plasmonic resonance for 2-D photonic crystal

In this article, we study the plasmonic resonance of infinite photonic crystal mounted by the double negative nanoparticles in two dimensions. The corresponding physical model is described by the Helmholz equation with so called Bloch wave condition in a periodic domain. By using the quasi-periodic layer potential techniques and the spectral theorem of quasi-periodic Neumann–Poincaré operator, the quasi-static expansion of the near field in the presence of nanoparticles is derived. Furthermore, when the magnetic permeability of nanoparticles satisfies the Drude model, we give the conditions under which the plasmonic resonance occurs, and the rate of blow up of near field energy with respect to nanoparticle's bulk electron relaxation rate and filling factor are also obtained. It indicates that one can appropriately control the bulk electron relaxation rate or filling factor of nanoparticle in photonic crystal structure such that the near field energy attains its maximum, and enhancing the efficiency of energy utilization.     

Vortex dynamics of a trapezoidal bluff body placed inside a circular pipe

The influence of Reynolds number and blockage ratio on the vortex dynamics of a trapezoidal bluff body placed inside a circular pipe is studied experimentally and numerically. Low aspect ratio, high blockage ratio, curved end conditions (junction of pipe and bluff body), axisymmetric upstream flow with shear and turbulence are some of the intrinsic features of this class of bluff body flows which have been scarcely addressed in the literature. A large range (200:200,000) of Reynolds number (Re_D) is covered in this study, encompassing all the three pipe flow regimes (laminar, transition and turbulent). Four different flow regimes are defined based on the distinct features of Strouhal number (St)–Re_D relation: steady, laminar irregular, transition and turbulent. The wake in the steady regime is stationary with no oscillations in the shear layer. The laminar regime is termed as irregular owing to irregular vortex shedding. The vortex shedding in this regime is observed to be symmetric. The emergence of separation bubble downstream of the bluff body on either side is another interesting feature of this regime, which is further observed to be symmetric. Two pairs of mean streamwise vortices are noticed in the near-wake regime, which are termed as reverse dipole-type wake topology. Beyond the irregular laminar regime, the Strouhal number falls gradually and vortex shedding becomes more periodic. This regime is named transition and occurs close to the Reynolds number at which transition to turbulence takes place in a fully developed pipe. The turbulent regime is characterised by a nearly constant Strouhal number. Typical Karman-type vortex shedding is noticed in this regime. The convection velocity, wake width formation length and irrecoverable pressure loss are quantified to highlight the influence of blockage ratio. These results will be useful to develop basic understanding of vortex dynamics of confined bluff body flow for several practical applications.