AMERICAN OPTIONS WITH REGIME SWITCHING

John Buffington () and Robert J. Elliott ()
Additional contact information
John Buffington: Deloitte & Touche LLP, Suite 230, 333 Clay St., Houston, TX, 77002-4196, USA
Robert J. Elliott: Faculty of Management, University of Calgary, Calgary, 2500 University Drive NW, Calgary, Alberta, Canada T2N 1N4, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2002, vol. 05, issue 05, 497-514

Abstract: A Black-Scholes market is considered in which the underlying economy, as modeled by the parameters and volatility of the processes, switches between a finite number of states. The switching is modeled by a hidden Markov chain. European options are priced and a Black-Scholes equation obtained. The approximate valuation of American options due to Barone-Adesi and Whaley is extended to this setting.

Keywords: Option pricing; free boundary problem; Black-Scholes equation (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S0219024902001523

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