Pricing derivatives with modeling CO2emission allowance using a regime-switching jump diffusion model: with regime-switching risk premium

2015 ◽  
Vol 22 (10) ◽  
pp. 887-908 ◽  
Author(s):  
Chang-Yi Li ◽  
Son-Nan Chen ◽  
Shih-Kuei Lin
Keyword(s):  
Diffusion Model ◽  
Risk Premium ◽  
Regime Switching ◽  
Jump Diffusion ◽  
Jump Diffusion Model

Option Pricing in a Jump-Diffusion Model with Regime Switching

2009 ◽  
Vol 39 (2) ◽  
pp. 515-539 ◽  
Author(s):  
Fei Lung Yuen ◽  
Hailiang Yang
Keyword(s):  
Diffusion Model ◽  
Regime Switching ◽  
Jump Diffusion ◽  
Mathematical Finance ◽  
Extended Model ◽  
Exotic Options ◽  
Switching Model ◽  
Jump Diffusion Model ◽  
Trinomial Tree ◽  
Tree Method

AbstractNowadays, the regime switching model has become a popular model in mathematical finance and actuarial science. The market is not complete when the model has regime switching. Thus, pricing the regime switching risk is an important issue. In Naik (1993), a jump diffusion model with two regimes is studied. In this paper, we extend the model of Naik (1993) to a multi-regime case. We present a trinomial tree method to price options in the extended model. Our results show that the trinomial tree method in this paper is an effective method; it is very fast and easy to implement. Compared with the existing methodologies, the proposed method has an obvious advantage when one needs to price exotic options and the number of regime states is large. Various numerical examples are presented to illustrate the ideas and methodologies.

scholarly journals Pricing Participating Products under a Generalized Jump-Diffusion Model

2008 ◽  
Vol 2008 ◽  
pp. 1-30 ◽  
Author(s):  
Tak Kuen Siu ◽  
John W. Lau ◽  
Hailiang Yang
Keyword(s):  
Diffusion Model ◽  
Life Insurance ◽  
Regime Switching ◽  
Jump Diffusion ◽  
Martingale Measure ◽  
Practical Implementation ◽  
Switching Models ◽  
Jump Diffusion Model ◽  
Equivalent Martingale ◽  
Markovian Regime Switching

We propose a model for valuing participating life insurance products under a generalized jump-diffusion model with a Markov-switching compensator. It also nests a number of important and popular models in finance, including the classes of jump-diffusion models and Markovian regime-switching models. The Esscher transform is employed to determine an equivalent martingale measure. Simulation experiments are conducted to illustrate the practical implementation of the model and to highlight some features that can be obtained from our model.

Stability of numerical methods under the regime-switching jump-diffusion model with variable coefficients

2019 ◽  
Vol 53 (5) ◽  
pp. 1741-1762
Author(s):  
Sunju Lee ◽  
Younhee Lee
Keyword(s):  
Numerical Methods ◽  
Diffusion Model ◽  
Regime Switching ◽  
Jump Diffusion ◽  
Variable Coefficients ◽  
Time Step ◽  
State Of The Economy ◽  
Jump Diffusion Model ◽  
Second Order Convergence ◽  
The Stability

In this paper we introduce three numerical methods to evaluate the prices of European, American, and barrier options under a regime-switching jump-diffusion model (RSJD model) where the volatility and other parameters are considered as variable coefficients. The prices of the European option, which is one of the financial derivatives, are given by a partial integro-differential equation (PIDE) problem and those of the American option are evaluated by solving a linear complementarity problem (LCP). The proposed methods are constructed to avoid the use of any fixed point iteration techniques at each state of the economy and time step. We analyze the stability of the proposed methods with respect to the discrete l2-norm in the time and spatial variables. A variety of numerical experiments are carried out to show the second-order convergence of the three numerical methods under the regime-switching jump-diffusion model with variable coefficients.

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