A DUPIRE EQUATION FOR A REGIME-SWITCHING MODEL

2015 ◽  
Vol 18 (04) ◽  
pp. 1550023 ◽  
Author(s):  
ROBERT J. ELLIOTT ◽  
LEUNGLUNG CHAN ◽  
TAK KUEN SIU
Keyword(s):  
Regime Switching ◽  
Price Dynamics ◽  
Local Volatility ◽  
Risky Assets ◽  
Regime Switching Model ◽  
Switching Model ◽  
Forward Equation ◽  
Local Volatility Model ◽  
Volatility Model ◽  
Forward Equations

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.

scholarly journals Stable reconstruction of the volatility in a regime-switching local-volatility model

2020 ◽  
Vol 10 (1) ◽  
pp. 189-215
Author(s):  
Mourad Bellassoued ◽  
◽  
Raymond Brummelhuis ◽  
Michel Cristofol ◽  
Éric Soccorsi ◽  
...  
Keyword(s):  
Regime Switching ◽  
Local Volatility ◽  
Local Volatility Model ◽  
Volatility Model ◽  
Stable Reconstruction

Existence of a calibrated regime switching local volatility model

2020 ◽  
Vol 30 (2) ◽  
pp. 501-546 ◽  
Author(s):  
Benjamin Jourdain ◽  
Alexandre Zhou
Keyword(s):  
Regime Switching ◽  
Local Volatility ◽  
Local Volatility Model ◽  
Volatility Model

REGIME-SWITCHING RECOMBINING TREE FOR OPTION PRICING

2010 ◽  
Vol 13 (03) ◽  
pp. 479-499 ◽  
Author(s):  
R. H. LIU
Keyword(s):  
Option Pricing ◽  
Regime Switching ◽  
Asset Price ◽  
Stochastic Volatility Model ◽  
Option Prices ◽  
Regime Switching Model ◽  
Switching Model ◽  
Tree Construction ◽  
Volatility Model ◽  
Tree Approach

In this paper we develop an efficient tree approach for option pricing when the underlying asset price follows a regime-switching model. The tree grows only linearly as the number of time steps increases. Thus it enables us to use large number of time steps to compute accurate prices for both European and American options. We present conditions that guarantee the positivity of branch probabilities. We numerically test the sensitivity of option prices to the choice of a key parameter for tree construction. As an interesting application, we develop a regime-switching model to approximate the Heston's stochastic volatility model and then employ the tree approach to approximate the option prices. Numerical results are provided and compared.

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