Pricing exotic options under regime switching

Boyle, Phelim; Draviam, Thangaraj

doi:10.1016/j.insmatheco.2006.05.001

Cited by 110 publications

(73 citation statements)

References 20 publications

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“…Early works are done on option pricing, see Di Masi et al (1994), Buffington and Elliott (2002), Boyle and Draviam (2007). After that, regime switching models are applied to many other aspects, such as Equity-linked life insurance pricing, see Hardy (2003); Bond Pricing, see Elliott and Siu (2009a); Portfolio selection, see Zhou and Yin (2003), Guidolin and Timmermann (2007), Chen et al (2008), Elliott and Siu (2009b); Optimal dividend, Lu (2006, 2007), etc.…”

Section: Introductionmentioning

confidence: 99%

Markowitz’s mean-variance asset-liability management with regime switching: A continuous-time model

Chen

Yang

Yin

2008

Insurance: Mathematics and Economics

105

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This paper considers an optimal portfolio selection problem under Markowitz's mean-variance portfolio selection problem in a multi-period regime switching model.We assume that there are n + 1 securities in the market. Given an economic state which is modeled by a finite state Markov chain, the return of each security at a fixed time point is a random variable. The return random variables may be different if the economic state is changed even for the same security at the same time point. We start our analysis from the no-liability case, in the spirit of Li and Ng (2000), both the optimal investment strategy and the efficient frontier are derived. Then we add uncontrollable liability into the model. By direct comparison with the no-liability case, the optimal strategy can be derived explicitly.

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Section: Introductionmentioning

confidence: 99%

Markowitz’s mean-variance asset-liability management with regime switching: A continuous-time model

Chen

Yang

Yin

2008

Insurance: Mathematics and Economics

105

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“…This should lead to the transition of volatilities of both the underlying stock and the option issuer's asset. The financial events are often modeled by the regime switching model to capture the changes of the market environment by the unanticipated events (see, e.g., Hamilton [8], Bollen [2], Buffington and Ellott [4], Boyle and Draviam [3], Zhang et al [15], Zhu et al [16], Elliott et al [7]). Based on this approach, we model the business cycle by a continuous-time two-state regime switching.…”

Section: Introductionmentioning

confidence: 99%

Probability for transition of business cycle and pricing of options with correlated credit risk

Kim

2018

HJMS

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In this paper we propose the transition probability of business cycle for the pricing of options with credit risk. In order to describe business cycles of markets, the regime switching model is considered. We provide the probability density functions of the occupation time of the high volatility regime via Laplace transforms. Using these functions we derive the analytic valuation formulae for options with correlated credit risk and business cycle. We also illustrate the important properties of options with numerical graphs.

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“…Markov regime switching models were first introduced by Hamilton [1] and recently have become popular in financial applications including equity options [2][3][4][5][6][7][8][9][10][11][12][13][14][15][16][17], bond prices and interest rate derivatives [18][19][20], portfolio selection [21], and trading rules [22][23][24][25][26]. The Markov regime switching models allow the model parameters (drift and volatility coefficients) to depend on a Markov chain which can reflect the information of the market environments and at the same time preserve the simplicity of the models.…”

Section: Introductionmentioning

confidence: 99%

Laplace Transform Methods for a Free Boundary Problem of Time-Fractional Partial Differential Equation System

Zhou

Gao

2017

Discrete Dynamics in Nature and Society

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We study the pricing of the American options with fractal transmission system under two-state regime switching models. This pricing problem can be formulated as a free boundary problem of time-fractional partial differential equation (FPDE) system. Firstly, applying Laplace transform to the governing FPDEs with respect to the time variable results in second-order ordinary differential equations (ODEs) with two free boundaries. Then, the solutions of ODEs are expressed in an explicit form. Consequently the early exercise boundaries and the values for the American option are recovered using the Gaver-Stehfest formula. Numerical comparisons of the methods with the finite difference methods are carried out to verify the efficiency of the methods.

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Pricing exotic options under regime switching

Cited by 110 publications

References 20 publications

Markowitz’s mean-variance asset-liability management with regime switching: A continuous-time model

Markowitz’s mean-variance asset-liability management with regime switching: A continuous-time model

Probability for transition of business cycle and pricing of options with correlated credit risk

Laplace Transform Methods for a Free Boundary Problem of Time-Fractional Partial Differential Equation System

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