A simple approach for pricing equity options with Markov switching state variables

Quantitative Finance

Volumn 6, Issue 2, 2006, Pages 95-105

  Aingworth, Donald D ^a   Das, Sanjiv R ^b   Motwani, Rajeev ^a  

^a Stanford University   (United States)

^b SANTA CLARA UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33646585125     PISSN: 14697688     EISSN: 14697696     Source Type: Journal    
DOI: 10.1080/14697680500511215     Document Type: Article

References (22)

1. Alexander, C., Normal mixture diffusion with uncertain volatility; modeling short and long-term smile effects. J. Bank. Finance, 2004, 28, 2957-2980.
2. Amin, K., Jump-diffusion option valuation in discrete-time. J. Finance, 1993, 48(5), 1833-1863.
3. Balsara, N., A finite difference approach to valuing options with markov switching variables. Working Paper, 2004 (Northeastern Illinois University).
4. Bates, D., Jumps and stochastic volatility: exchange rate processes implicit in deutsch mark options. Rev. Financ. Stud., 1996, 9(1), 69-107.
5. Black, F., and Scholes, M., The pricing of options and corporate liabilities. J. Polit. Econ., 1973, 81, 637-654.
6. Bollen, N., Valuing options in regime-switching models. J. Deriv., 1998, 6, 38-49.
7. Brigo, D. and Mercurio, F., Lognormal-mixture dynamics and calibration to market volatility smiles. Int. J. Theoret. Appl. Finance, 2002, 5(4), 427-446.
8. Brigo, D., Mercurio, F. and Rapisarda, F., Smile at uncertainty. Risk, 2004, 17(5), 97-101.
9. Cox, J., Ross, S. and Rubinstein, M., Option pricing: a simplified approach. J. Financ. Econ., 1979, 3, 145-166.
10. Duan, J.C.. Popova, I. and Ritchken, P., Option pricing under regime switching. Working Paper, 1998 (Hong Kong University of Science and Technology).
11. Florescu, I. and Viens, F., A binomial tree approach to stochastic volatility driven model of the stock price. Ann. Univ. Craiova Math. Comp. Sci. Ser., 2004, 31(2), 1-17.
12. Hamilton, J., Analysis of time series subject to changes in regime. J. Econometrics, 1990, 45, 39-70.
13. Harrison, J., and Kreps, D., Martingales and arbitrage in multi-period securities markets. J. Econ. Theory, 1979, 20, 381-408.
14. Harrison, J. and Pliska, S., Martingales and stochastic integrals in the theory of continuous trading. Stochast. Process. Appl., 1981, 11, 215-260.
15. Heston, S., A closed-form solution for options with stochastic volatility with applications to bond and currency options. Rev. Financ. Stud., 1993, 6, 327-343.
16. Hilliard, J.E., and Schwartz, A., Binomial option pricing under stochastic volatility and correlated state variables. J. Deriv., 1996, 4(1), 23-39.
17. Hull, J. and White, A., The pricing of options on assets with stochastic volatilities. J. Finance, 1987, 42, 281-300.
18. Jarrow, R.A. and Rudd, A., Option Pricing, 1983 (Dow Jones-Irwin: Homewood, IL).
19. Leisen, D., Stock evolution under stochastic volatility: a discrete approach. Discussion Paper No. B-407, 2000 (Stanford University).
20. Longstaff, F.A. and Schwartz, E.S., Valuing American options by simulation: a simple least-squares approach. Rev. Financ. Stud., 2001, 14, 113-147.
21. Mercurio, F., A multi-stage uncertain volatility model. Working Paper, 2002 (Banca IMI: Milano).
22. Merton, R.C., The theory of rational option pricing. Bell J. Econ. Manage. Sci., 1973, 4, 141-183.