Pricing exotic options in a regime switching economy: a Fourier transform method

Peter Hieber ()
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Peter Hieber: University of Ulm

Review of Derivatives Research, 2018, vol. 21, issue 2, No 4, 252 pages

Abstract: Abstract This article considers the valuation of digital, barrier, and lookback options in a Markovian, regime-switching, Black–Scholes model. In Fourier space, integral representations for the option prices are derived via the theory on matrix Wiener–Hopf factorizations. Our main focus is on the 2-state case where the matrix Wiener–Hopf factorization is available analytically. A comparison to several numerical alternatives (analytical approximations, the Brownian bridge algorithm and a finite element scheme) demonstrates that the pricing formulas are easy to implement and lead to accurate price estimates.

Keywords: Regime switching; Markov switching; Wiener–Hopf factorization; Option pricing (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11147-017-9139-1

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