A regime-switching model with the volatility smile for two-asset European options

作者：Kim Junseok^*; Jeong Darae; Shin Dong Hoon

来源：Automatica, 2014, 50(3): 747-755.

DOI：10.1016/j.automatica.2013.12.019

• Regime-switching model
• Finite difference method
• Operator splitting method
• Volatility smile

In this paper, we consider a numerical European-style option pricing method under two regime-switching underlying assets depending on the market regime. For a risk neutral market condition, we consider regime-switching model with two assets using a Feynman-Kac type formula. And to solve the option problem with regime-switching model, we apply an operator splitting method. Numerical examples show the volatility smile and the volatility term structure under varying parameters on a two state regime switching model.

• 出版日期2014-3