𝔖 Bobbio Scriptorium
✦   LIBER   ✦

Option pricing under Markov-switching GARCH processes

✍ Scribed by Chao-Chun Chen; Ming-Yang Hung

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
161 KB
Volume
30
Category
Article
ISSN
0270-7314

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

This study proposes an N ‐state Markov‐switching general autoregressive conditionally heteroskedastic (MS‐GARCH) option model and develops a new lattice algorithm to price derivatives under this framework. The MS‐GARCH option model allows volatility dynamics switching between different GARCH processes with a hidden Markov chain, thus exhibiting high flexibility in capturing the dynamics of financial variables. To measure the pricing performance of the MS‐GARCH lattice algorithm, we investigate the convergence of European option prices produced on the new lattice to their true values as conducted by the simulation. These results are very satisfactory. The empirical evidence also suggests that the MS‐GARCH model performs well in fitting the data in‐sample and one‐week‐ahead out‐of‐sample prediction. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:444–464, 2010

📜 SIMILAR VOLUMES

Pricing foreign equity options under Lév
Pricing foreign equity options under Lévy processes
✍ Shian-Chang Huang; Mao-Wei Hung 📂 Article 📅 2005 🏛 John Wiley and Sons 🌐 English ⚖ 262 KB

This article investigates the valuation of a foreign equity option whose value depends on the exchange rate and foreign equity prices. Assuming that these underlying price processes are correlated and driven by a multidimensional Lévy process, a method suitable for solving the complex valuation prob

Pricing credit spread options under a Ma
Pricing credit spread options under a Markov chain model with stochastic default rate
✍ Jangkoo Kang; Hwa-Sung Kim 📂 Article 📅 2004 🏛 John Wiley and Sons 🌐 English ⚖ 137 KB 👁 1 views

## Abstract This paper studies a Markov chain model that, unlike the existing models, has a stochastic default rate model so as to reflect real world phenomena. We extend the existing Markov chain models as follows: First, our model includes both the economy‐wide and the rating‐specific factors, wh

The pricing of foreign currency options
The pricing of foreign currency options under jump-diffusion processes
✍ Chang Mo Ahn; D. Chinhyung Cho; Keehwan Park 📂 Article 📅 2007 🏛 John Wiley and Sons 🌐 English ⚖ 238 KB 👁 1 views

## Abstract In this article, the authors derive explicit formulas for European foreign exchange (FX) call and put option values when the exchange rate dynamics are governed by jump‐diffusion processes. The authors use a simple general equilibrium international asset pricing model with continuous tr

Pricing basket and Asian options under t
Pricing basket and Asian options under the jump-diffusion process
✍ Kwangil Bae; Jangkoo Kang; Hwa-Sung Kim 📂 Article 📅 2011 🏛 John Wiley and Sons 🌐 English ⚖ 230 KB 👁 1 views

## Abstract This study derives approximate valuation formulas for basket options and Asian options under the jump‐diffusion process. To obtain an approximation for options prices under the jump‐diffusion process, we extend the Taylor expansion method developed by Ju N. (2002) under the diffusion pr