An Explicit Solution for Perpetual American Put Options in a Markov-Modulated Jump Diffusion Model

Abstract

This paper is concerned with  the pricing of perpetual American put options when the dynamics of the risky underlying asset are driven by a jump diffusion with Markovian switching. By using  the ``modified smooth pasting'' technique, we derive an explicit optimal stopping rule and the corresponding value function in a closed form.  Finally, we present a numerical example to illustrate the application of the exact solution.