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1 results

  • Option Pricing in a Jump-Diffusion Model with Regime Switching

  • Fei Lung Yuen, Hailiang Yang
  • Journal:
    ASTIN Bulletin: The Journal of the IAA / Volume 39 / Issue 2 / November 2009
    Published online by Cambridge University Press:
    09 August 2013, pp. 515-539
    Print publication:
    November 2009

  • Nowadays, 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.