Option pricing under regime-switching jump-diffusion models

JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS

卷:256

Article

Costabile, Massimo¹  Leccadito, Arturo¹  Massabo, Ivar¹  Russo, Emilio¹ 

[1] Univ Calabria, Dept Econ Stat & Finance, I-87036 Arcavacata Di Rende, CS, Italy

关键词: Option pricing;    Regime-switching models;    Jump diffusion models;    Multinomial tree;   

DOI  :  10.1016/j.cam.2013.07.046

来源: Elsevier

【 摘 要 】

We present an explicit formula and a multinomial approach for pricing contingent claims under a regime-switching jump-diffusion model. The explicit formula, obtained as an expectation of Merton-type formulae for jump-diffusion processes, allows to compute the price of European options in the case of a two-regime economy with lognormal jumps, while the multinomial approach allows to accommodate an arbitrary number of regimes and a generic jump size distribution, and is suitable for pricing American-style options. The latter algorithm discretizes log-returns in each regime independently, starting from the highest volatility regime where a recombining multinomial lattice is established. In the remaining regimes, lattice nodes are the same but branching probabilities are adjusted. Derivative prices are computed by a backward induction scheme. (C) 2013 Elsevier B.V. All rights reserved.

【 授权许可】

Free