WSEAS Transactions on Mathematics
Print ISSN: 1109-2769, E-ISSN: 2224-2880
Volume 15, 2016
Pricing Forward Starting Options Under Regime Switching Jump Diffusion Models
Authors: Wei Wang, Liegang Dong, Xiaonan Su
Abstract: This paper studies the pricing of forward starting options under regime switching jump diffusion models. We suppose that a market economy has only two states, one is a stable state, the other is a high volatility state. The dynamics of a risky asset is modeled by a geometry Brownian motion when the market state is stable, otherwise, it follows a jump diffusion model. We propose two types of regime switching jump diffusion models: one is a two-state regime switching Merton jump diffusion model, and the other is a two-state regime switching double exponential jump diffusion model. Finally, some analytic formulas for pricing forward starting options are derived under these regime switching jump diffusion models.
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Keywords: Jump diffusion, Option pricing, Regime switching
Pages: 185-195
WSEAS Transactions on Mathematics, ISSN / E-ISSN: 1109-2769 / 2224-2880, Volume 15, 2016, Art. #18