A tree approach to options pricing under regime-switching jump diffusion models

作者：Liu R H; Nguyen D^*

来源：International Journal of Computer Mathematics, 2015, 92(12): 2575-2595.

DOI：10.1080/00207160.2015.1073266

• option pricing
• regime-switching model
• trinomial tree
• stochastic approximation
• financial derivatives

A simple, efficient tree is developed to price options in a very general regime-switching jump diffusion model. Under this model, the switching rates of the switching process depend on the underlying stock price process. Sufficient conditions that guarantee the positivity of branch probabilities are provided. Using the regime-switching tree, we approximate Heston's stochastic volatility model with an additional jump component. Finally, we illustrate the effectiveness of the tree method by several numerical examples.

• 出版日期2015-12-2