Abstract
In this paper, we consider a numerical European-style option pricing method under two regime-switching underlying assets depending on the market regime. For a risk neutral market condition, we consider regime-switching model with two assets using a Feynman-Kac type formula. And to solve the option problem with regime-switching model, we apply an operator splitting method. Numerical examples show the volatility smile and the volatility term structure under varying parameters on a two state regime switching model.
| Original language | English |
|---|---|
| Pages (from-to) | 747-755 |
| Number of pages | 9 |
| Journal | Automatica |
| Volume | 50 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2014 Jan 1 |
ASJC Scopus subject areas
- Control and Systems Engineering
- Electrical and Electronic Engineering
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Kim, J., Jeong, D., & Shin, D. H. (2014). A regime-switching model with the volatility smile for two-asset European options. Automatica, 50(3), 747-755. https://doi.org/10.1016/j.automatica.2013.12.019