Pricing foreign equity options with regime-switching

Kun Fan, Yang Shen, Tak Kuen Siu*, Rongming Wang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

12 Citations (Scopus)

Abstract

In this paper, we investigate the valuation of two types of foreign equity options under a Markovian regime-switching mean-reversion lognormal model, where some key model parameters in the dynamics of the foreign equity price and the foreign exchange rate are modulated by a continuous-time, finite-state Markov chain. A fast Fourier transform (FFT) approach is applied to provide an efficient way to evaluate the option prices. Numerical analysis and empirical studies are provided to illustrate the practical implementation of the proposed pricing model.

Original languageEnglish
Pages (from-to)296-305
Number of pages10
JournalEconomic Modelling
Volume37
DOIs
Publication statusPublished - Feb 2014

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