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An exact and explicit formula for pricing lookback options with regime switching

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  • Leunglung Chan
  • Song-Ping Zhu

Abstract

This paper investigates the pricing of European-style lookback options when the price dynamics of the underlying risky asset are assumed to follow a Markov-modulated Geo-metric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on unobservable states of the economy described by a continuous-time hidden Markov chain process. We derive an exact, explicit and closed-form solution for European-style lookback options in a two-state regime switching model.

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  • Leunglung Chan & Song-Ping Zhu, 2014. "An exact and explicit formula for pricing lookback options with regime switching," Papers 1407.4864, arXiv.org.
    • Handle: RePEc:arx:papers:1407.4864
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    References listed on IDEAS

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    1. Boyle, Phelim & Draviam, Thangaraj, 2007. "Pricing exotic options under regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 40(2), pages 267-282, March.
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    4. Robert J. Elliott & Leunglung Chan & Tak Kuen Siu, 2005. "Option pricing and Esscher transform under regime switching," Annals of Finance, Springer, vol. 1(4), pages 423-432, October.
    5. Goldman, M Barry & Sosin, Howard B & Gatto, Mary Ann, 1979. "Path Dependent Options: "Buy at the Low, Sell at the High"," Journal of Finance, American Finance Association, vol. 34(5), pages 1111-1127, December.
    6. X. Guo, 2001. "Information and option pricings," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 38-44.
    7. Song-Ping Zhu, 2006. "An exact and explicit solution for the valuation of American put options," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 229-242.
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