Pricing foreign equity options with regime-switching

Kun Fan, Yang Shen, Tak Kuen Siu and Rongming Wang

Economic Modelling, 2014, vol. 37, issue C, 296-305

Abstract: In this paper, we investigate the valuation of two types of foreign equity options under a Markovian regime-switching mean-reversion lognormal model, where some key model parameters in the dynamics of the foreign equity price and the foreign exchange rate are modulated by a continuous-time, finite-state Markov chain. A fast Fourier transform (FFT) approach is applied to provide an efficient way to evaluate the option prices. Numerical analysis and empirical studies are provided to illustrate the practical implementation of the proposed pricing model.

Keywords: Foreign equity option; Regime-switching; Mean-reversion; Fast Fourier transform (search for similar items in EconPapers)
JEL-codes: F31 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:37:y:2014:i:c:p:296-305

DOI: 10.1016/j.econmod.2013.11.009

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