An analytic valuation method for multivariate contingent claims with regime-switching volatilities |
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Authors: | Ji Hee YoonBong-Gyu Jang Kum-Hwan Roh |
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Affiliation: | a KIS Pricing, Inc., Seoul, 150-885, Republic of Koreab Department of Industrial and Management Engineering, POSTECH, Pohang, 790-784, Republic of Koreac MiraeAsset Security Company, Seoul, 150-743, Republic of Korea |
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Abstract: | In this paper, we provide an analytic valuation method for European-type contingent claims written on multiple assets in a stochastic market environment. We employ a two-state Markov regime-switching volatility in order to reflect stochastically changing market conditions. The method is developed by exploiting the probability density of the occupation time for which the underlying asset processes are in a certain regime during a time period. In order to show its usefulness, we derive analytic valuation formulas for quanto options and exchange options with two underlying assets, as examples. |
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Keywords: | Multivariate contingent claim Derivative pricing Regime switch Business cycle Stochastic volatility |
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