A DUPIRE EQUATION FOR A REGIME-SWITCHING MODEL

Robert J. Elliott (), Leunglung Chan () and Tak Kuen Siu
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Robert J. Elliott: School of Mathematical Sciences, The University of Adelaide, Adelaide 5005, Australia;
Leunglung Chan: School of Mathematics and Statistics, University of New South Wales, NSW 2052, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 04, 1-13

Abstract: A forward equation, which is also called the Dupire formula, is obtained for European call options when the price dynamics of the underlying risky assets are assumed to follow a regime-switching local volatility model. Using a regime-switching version of the adjoint formula, a system of coupled forward equations is derived for the price of the European call over different states of the economy.

Keywords: Regime-switching local volatility model; Esscher transform; forward equations; regime-switching adjoint formula (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219024915500235

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