Pricing foreign equity options under a regime-switching model with liquidity risk and default risk

Shengjie Yue, Chaoqun Ma, Chao Deng and Xinwei Zhao

Communications in Statistics - Theory and Methods, 2025, vol. 54, issue 16, 4981-5005

Abstract: This article focuses on the pricing problem of foreign equity options under a Markovian regime-switching model with liquidity risk and default risk. Some basic parameters of foreign equity price, foreign exchange rate, and counterparty’s asset value are controlled by a continuous-times Markov chain. We adopt the liquidity discount factor to describe effects of the market liquidity on foreign equity price and counterparty’s asset value. The regime-switching Esscher transform is used to derive a risk-neutral measure. Based on the proposed pricing framework, we provide an explicit pricing formula for foreign equity options with default risk via the Fourier transform technique. Finally, numerical analysis is presented to illustrate the effects of regime-switching, liquidity risk, and default risk on the option price.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/03610926.2024.2430740 (text/html)
Access to full text is restricted to subscribers.

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:taf:lstaxx:v:54:y:2025:i:16:p:4981-5005

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/lsta20

DOI: 10.1080/03610926.2024.2430740

Access Statistics for this article

Communications in Statistics - Theory and Methods is currently edited by Debbie Iscoe

More articles in Communications in Statistics - Theory and Methods from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().