American options and callable bonds under stochastic interest rates and endogenous bankruptcy (Q660162)

This paper introduces a new method for pricing American equity options under a general multifactor diffusion model. The author shows that the efficiency of the proposed method depends on both a viable valuation method and the transition density of the state variables in the model. In the case of the Gauss-Markov stochastic interest rate environment, the proposed valuation method is shown to offer a much better accuracy-efficiency trade-off than some existing approximation methods. The author has also applied the proposed method to price callable corporate bonds in the context of an endogenous bankruptcy structural model.