 FOURIER TRANSFORM METHODS FOR REGIME-SWITCHING JUMP-DIFFUSIONS AND THE PRICING OF FORWARD STARTING OPTIONSInternational Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 05, 1-26 Abstract: In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework. Keywords: Regime switching jump-diffusion models; Fourier transform methods; option pricing; Forward Starting options; stochastic volatility models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:15:y:2012:i:05:n:s0219024912500379 Ordering information: This journal article can be ordered from DOI: 10.1142/S0219024912500379 Access Statistics for this article International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd. |
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