A path-independent method for barrier option pricing in hidden Markov models

Hedieh Rashidi Ranjbar and Abbas Seifi

Physica A: Statistical Mechanics and its Applications, 2015, vol. 440, issue C, 1-8

Abstract: This paper presents a method for barrier option pricing under a Black–Scholes model with Markov switching. We extend the option pricing method of Buffington and Elliott to price continuously monitored barrier options under a Black–Scholes model with regime switching. We use a regime switching random Esscher transform in order to determine an equivalent martingale pricing measure, and then solve the resulting multidimensional integral for pricing barrier options. We have calculated prices for down-and-out call options under a two-state hidden Markov model using two different Monte-Carlo simulation approaches and the proposed method. A comparison of the results shows that our method is faster than Monte-Carlo simulation methods.

Keywords: Barrier option pricing; Markov-switching; Esscher transform; Monte-Carlo simulation (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S037843711500655X
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:440:y:2015:i:c:p:1-8

DOI: 10.1016/j.physa.2015.08.003

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().