Option Pricing with a Regime-Switching Lévy Model

Chi Chung Siu ()

Chapter 8 in Recent Advances in Financial Engineering 2010, 2011, pp 151-179 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn this paper, we present analytical solutions for the Laplace transforms of vanilla, barrier, and lookback options when the underlying process is a regime-switching jump-diffusion process. These closed-form solutions are possible due to the analytical characterization of the joint distribution of the underlying process with its running maximum or minimum under the regime-switching jump-diffusion model, developed in Kijima and Siu (2010). By performing the appropriate numerical Laplace inversion, we can recover the corresponding prices efficiently and stably.

Keywords: Operations Research; Financial Engineering; Management; Mathematical Modeling; Credit Risk; Real Options; Optimal Investment; Heterogeneous Beliefs (search for similar items in EconPapers)
Date: 2011
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