Pricing and hedging barrier options under a Markov-modulated double exponential jump diffusion-CIR model

Son-Nan Chen and Pao-Peng Hsu

International Review of Economics & Finance, 2018, vol. 56, issue C, 330-346

Abstract: A semi-closed-form valuation model is presented for barrier options whose underlying asset follows a mean-reverting and regime-switching double exponential jump diffusion process, and the interest rate is modulated by a mean-reverting square root model. The proposed model captures the impact of regime-switching uncertainty on barrier option prices and their hedge parameters in long and short business cycles. The model provides richer economic insight and is more appropriate for valuing barrier options in commodity markets as well as in equity and foreign-exchange markets, when an economy faces regime-switching uncertainty.

Keywords: Hidden Markov chain; Double exponential jump diffusion process; Barrier options (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056017308547
Full text for ScienceDirect subscribers only

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:reveco:v:56:y:2018:i:c:p:330-346

DOI: 10.1016/j.iref.2017.11.003

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().