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 |
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Pages (from-to) | 747-755 |
Number of pages | 9 |
Journal | Automatica |
Volume | 50 |
Issue number | 3 |
DOIs | |
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