Carr's randomization for American options in regime-switching models |
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Authors: | S Boyarchenko S Levendorski? |
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Institution: | Department of Economics, University of Texas at Austin, 1 University Station C3100, Austin, TX 78712, USA |
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Abstract: | In the paper, we solve the pricing problem for American put-like options in Markov-modulated Lévy models. The early exercise boundaries and prices are calculated using a generalization of Carr's randomization for regime-switching models. An efficient iteration pricing procedure is developed. The computational time is of order m2, where m is the number of states, and of order m, if the parallel computations are allowed. The payoffs, riskless rates and class of Lévy processes may depend on a state. Special cases are stochastic volatility models and models with stochastic interest rate; both must be modelled as finite-state Markov chains. (© 2008 WILEY-VCH Verlag GmbH & Co. KGaA, Weinheim) |
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