Valuation of chooser options with state-dependent risks

Yu-Min Lian and Jun-Home Chen

Finance Research Letters, 2023, vol. 52, issue C

Abstract: In this study, the underlying stock price dynamics and the forward interest rate processes are, respectively, driven by a Markovian regime-switching jump-diffusion model and a state-dependent Heath-Jarrow-Morton model. Furthermore, we employ the regime-switching Esscher transform to identify a risk-neutral martingale measure, which is used to derive integral expressions on prices of European-style chooser options. Eventually, numerical examples are provided and discussed.

Keywords: Markovian regime-switching jump-diffusion model; State-dependent Heath-Jarrow-Morton model; Markov chain; Regime-switching Esscher transform; Chooser option (search for similar items in EconPapers)
JEL-codes: E32 G01 G12 G13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007036

DOI: 10.1016/j.frl.2022.103527

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