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
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 the Institute of Basic Science Korea University . The material in this paper was not presented at any conference. This paper was recommended for publication in revised form by Editor Berç Rüstem.
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.
Copyright:
Copyright 2014 Elsevier B.V., All rights reserved.
PY - 2014/3
Y1 - 2014/3
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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U2 - 10.1016/j.automatica.2013.12.019
DO - 10.1016/j.automatica.2013.12.019
M3 - Article
AN - SCOPUS:84895921566
VL - 50
SP - 747
EP - 755
JO - Automatica
JF - Automatica
SN - 0005-1098
IS - 3
ER -