A Dupire equation for a regime-switching model

Robert J. Elliott, Leunglung Chan, Tak Kuen Siu

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)

Abstract

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.

Original languageEnglish
Article number1550023
Pages (from-to)1-13
Number of pages13
JournalInternational Journal of Theoretical and Applied Finance
Volume18
Issue number4
DOIs
Publication statusPublished - 22 Jun 2015

Keywords

  • Esscher transform
  • Regime-switching local volatility model
  • forward equations
  • regime-switching adjoint formula

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