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 Jan 1

ASJC Scopus subject areas

Control and Systems Engineering
Electrical and Electronic Engineering

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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.

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