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

Junseok Kim, Darae Jeong, Dong Hoon Shin

Research output: Contribution to journalArticle

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 languageEnglish
Pages (from-to)747-755
Number of pages9
JournalAutomatica
Volume50
Issue number3
DOIs
Publication statusPublished - 2014 Jan 1

ASJC Scopus subject areas

  • Control and Systems Engineering
  • Electrical and Electronic Engineering

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