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Exercising Optimal Options
Bauer Finance Faculty Creates Novel Computational Methodology
Published on November 18, 2020
A Department of Finance faculty member from the C. T. Bauer College of Business published an influential paper in a top tier journal earlier this year that investigates why investors don’t exercise their options optimally.
Assistant Professor Paola Pederzoli and co-authors developed a novel computational methodology and revised the definition of optimal exercise. Using a richer econometric model, they found rationalization for part of the suboptimal behavior of American options investors.
“Pricing with stochastic volatility and jumps instead of the Black-Scholes-Merton benchmark cuts by a quarter the amount lost by investors through suboptimal exercise,” the researchers write.
“Early exercise decision in American options with dividends, stochastic volatility and jumps,” was published by the Journal of Financial and Quantitative Analysis and won the Swiss Derivative Award Nomination Prize in 2017. It has also been cited in MoneyScience, a news source for notable quantitative research in the field of finance.
Pederzoli earned her Ph.D. from the Swiss Finance Institute, University of Geneva. She has undergraduate and master’s degrees in mathematics from the University of Pavia, Italy and was a visiting scholar at the London School of Economics and Queen Mary University of London in 2017.
Her research interests include asset pricing, derivatives, market microstructure and financial econometrics. She won the Best Paper in Derivatives and Options at the 2019 meeting of the Financial Management Association.
