An Analytic Approach for Pricing American Options with Regime Switching

Leunglung Chan and Song-Ping Zhu
Additional contact information
Leunglung Chan: School of Mathematics and Statistics, University of New South Wales, Sydney, NSW 2052, Australia
Song-Ping Zhu: School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia

JRFM, 2021, vol. 14, issue 5, 1-20

Abstract: This paper investigates the American option price in a two-state regime-switching model. The dynamics of underlying are driven by a Markov-modulated Geometric Wiener process. That means the interest rate, the appreciation rate, and the volatility of underlying rely on hidden states of the economy which can be interpreted in terms of Markov chains. By means of the homotopy analysis method, an explicit formula for pricing two-state regime-switching American options is presented.

Keywords: option pricing; free boundary problem; regime switching; homotopy analysis method (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mdpi.com/1911-8074/14/5/188/pdf (application/pdf)
https://www.mdpi.com/1911-8074/14/5/188/ (text/html)

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:gam:jjrfmx:v:14:y:2021:i:5:p:188-:d:540271

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().