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.
|Number of pages||13|
|Journal||International Journal of Theoretical and Applied Finance|
|Publication status||Published - 22 Jun 2015|
- Esscher transform
- Regime-switching local volatility model
- forward equations
- regime-switching adjoint formula