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Development of computational algorithms for pricing European bond options under the influence of macro-economic conditions

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  • Huang, Jia-Ping
  • Sumita, Ushio

Abstract

In this paper, a stochastic process of Vasicek type describing the short rate is considered, where the three governing parameters {ϕ,α,σ}, with ϕ for the market fitting, α for the reversion and σ for the volatility, would depend on the macro-economic condition modeled as an independent birth–death process on a finite state space. Computational algorithms are developed for evaluating the prices of European call options defined on a zero-coupon discount bond characterized by the above stochastic process. Numerical examples are provided based on real data so as to demonstrate the speed and efficiency of the proposed algorithms.

Suggested Citation

  • Huang, Jia-Ping & Sumita, Ushio, 2015. "Development of computational algorithms for pricing European bond options under the influence of macro-economic conditions," Applied Mathematics and Computation, Elsevier, vol. 251(C), pages 453-468.
    • Handle: RePEc:eee:apmaco:v:251:y:2015:i:c:p:453-468
    DOI: 10.1016/j.amc.2014.11.071
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