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 |
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ASJC Scopus subject areas
- Control and Systems Engineering
- Electrical and Electronic Engineering
Cite this
A regime-switching model with the volatility smile for two-asset European options. / Kim, Junseok; Jeong, Darae; Shin, Dong Hoon.
In: Automatica, Vol. 50, No. 3, 01.01.2014, p. 747-755.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - A regime-switching model with the volatility smile for two-asset European options
AU - Kim, Junseok
AU - Jeong, Darae
AU - Shin, Dong Hoon
PY - 2014/1/1
Y1 - 2014/1/1
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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UR - http://www.scopus.com/inward/citedby.url?scp=84895921566&partnerID=8YFLogxK
U2 - 10.1016/j.automatica.2013.12.019
DO - 10.1016/j.automatica.2013.12.019
M3 - Article
VL - 50
SP - 747
EP - 755
JO - Automatica
JF - Automatica
SN - 0005-1098
IS - 3
ER -