TY - JOUR
T1 - Pricing exotic options in a regime switching economy
T2 - a Fourier transform method
AU - Hieber, Peter
N1 - Publisher Copyright:
© 2017, Springer Science+Business Media, LLC.
PY - 2018/7/1
Y1 - 2018/7/1
N2 - This article considers the valuation of digital, barrier, and lookback options in a Markovian, regime-switching, Black–Scholes model. In Fourier space, integral representations for the option prices are derived via the theory on matrix Wiener–Hopf factorizations. Our main focus is on the 2-state case where the matrix Wiener–Hopf factorization is available analytically. A comparison to several numerical alternatives (analytical approximations, the Brownian bridge algorithm and a finite element scheme) demonstrates that the pricing formulas are easy to implement and lead to accurate price estimates.
AB - This article considers the valuation of digital, barrier, and lookback options in a Markovian, regime-switching, Black–Scholes model. In Fourier space, integral representations for the option prices are derived via the theory on matrix Wiener–Hopf factorizations. Our main focus is on the 2-state case where the matrix Wiener–Hopf factorization is available analytically. A comparison to several numerical alternatives (analytical approximations, the Brownian bridge algorithm and a finite element scheme) demonstrates that the pricing formulas are easy to implement and lead to accurate price estimates.
KW - Markov switching
KW - Option pricing
KW - Regime switching
KW - Wiener–Hopf factorization
UR - http://www.scopus.com/inward/record.url?scp=85029782445&partnerID=8YFLogxK
U2 - 10.1007/s11147-017-9139-1
DO - 10.1007/s11147-017-9139-1
M3 - Article
AN - SCOPUS:85029782445
SN - 1380-6645
VL - 21
SP - 231
EP - 252
JO - Review of Derivatives Research
JF - Review of Derivatives Research
IS - 2
ER -