On pricing double-barrier options with Markov regime switching

Xiaoyuan Zhang and Tianqi Zhang

Finance Research Letters, 2023, vol. 51, issue C

Abstract: We propose an efficient method for valuation of double-barrier options in a Markov regime switching diffusion model. This model incorporates three factors: Structural changes in economic conditions, business and investment environments into the diffusion process, and capturing some important properties of asset returns such as asymmetry and heavy tails. Under a such framework, we provide the closed-form upper and lower bounds of double-barrier options using Fourier series expansion. Furthermore, the bounds can also be systemically improved to get higher accuracy. In addition, we carry out extensive numerical experiments, and the results show that the solution we derive is tight.

Keywords: Double-barrier option; Markov regime switching; Diffusion process; Upper and lower bounds (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005906

DOI: 10.1016/j.frl.2022.103413

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