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.

Convergence of the Binomial Tree Method for American Options in a Jump-Diffusion Model

2005 ◽  
Vol 42 (5) ◽  
pp. 1899-1913 ◽  
Author(s):  
Xiao-song Qian ◽  
Cheng-long Xu ◽  
Li-shang Jiang ◽  
Bao-jun Bian
Keyword(s):  
Diffusion Model ◽  
American Options ◽  
Jump Diffusion ◽  
Binomial Tree ◽  
Jump Diffusion Model ◽  
Tree Method

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.

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