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Option Pricing with a Regime-Switching Lévy Model

In: Recent Advances In Financial Engineering 2010

Author

Listed:
  • Chi Chung Siu

    (Graduate School of Social Sciences, Tokyo Metropolitan University, 1-1 Minami-Ohsawa, Hachiohji, Tokyo 192-0397, Japan)

Abstract

In this paper, we present analytical solutions for the Laplace transforms of vanilla, barrier, and lookback options when the underlying process is a regime-switching jump-diffusion process. These closed-form solutions are possible due to the analytical characterization of the joint distribution of the underlying process with its running maximum or minimum under the regime-switching jump-diffusion model, developed in Kijima and Siu (2010). By performing the appropriate numerical Laplace inversion, we can recover the corresponding prices efficiently and stably.

Suggested Citation

  • Chi Chung Siu, 2011. "Option Pricing with a Regime-Switching Lévy Model," World Scientific Book Chapters, in: Masaaki Kijima & Chiaki Hara & Yukio Muromachi & Hidetaka Nakaoka & Katsumasa Nishide (ed.), Recent Advances In Financial Engineering 2010, chapter 8, pages 151-179, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814366038_0008
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