Variational formulation of American option prices in the Heston Model (1711.11311v2)

Abstract: We give an analytical characterization of the price function of an American option in Heston-type models. Our approach is based on variational inequalities and extends recent results of Daskalopoulos and Feehan (2011). We study the existence and uniqueness of a weak solution of the associated degenerate parabolic obstacle problem. Then, we use suitable estimates on the joint distribution of the log-price process and the volatility process in order to characterize the analytical weak solution as the solution to the optimal stopping problem. We also rely on semi-group techniques and on the affine property of the model.