A regime-switching model with the volatility smile for two-asset European options

Junseok Kim; Darae Jeong; Dong Hoon Shin

doi:10.1016/j.automatica.2013.12.019

A regime-switching model with the volatility smile for two-asset European options

Junseok Kim, Darae Jeong, Dong Hoon Shin

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

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	https://doi.org/10.1016/j.automatica.2013.12.019
Publication status	Published - 2014 Mar

Keywords

Finite difference method
Operator splitting method
Regime-switching model
Volatility smile

ASJC Scopus subject areas

Control and Systems Engineering
Electrical and Electronic Engineering

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10.1016/j.automatica.2013.12.019

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title = "A regime-switching model with the volatility smile for two-asset European options",

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.",

keywords = "Finite difference method, Operator splitting method, Regime-switching model, Volatility smile",

author = "Junseok Kim and Darae Jeong and Shin, {Dong Hoon}",

note = "Funding Information: The first author (J.S. Kim) was supported by the National Institute for Mathematical Sciences (NIMS) grant funded by the Korea government (No. A21301 ). The corresponding author (D.H. Shin) was supported by Inha University and a Korea University Grant. ",

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AU - Jeong, Darae

AU - Shin, Dong Hoon

N1 - Funding Information: The first author (J.S. Kim) was supported by the National Institute for Mathematical Sciences (NIMS) grant funded by the Korea government (No. A21301 ). The corresponding author (D.H. Shin) was supported by Inha University and a Korea University Grant.

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N2 - 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.

AB - 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.

KW - Finite difference method

KW - Operator splitting method

KW - Regime-switching model

KW - Volatility smile

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JO - Automatica

JF - Automatica

SN - 0005-1098

IS - 3

ER -

A regime-switching model with the volatility smile for two-asset European options

Abstract

Keywords

ASJC Scopus subject areas

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