European Option Pricing under the Structural Time Series and Markov Regime-switching Model
Journal: Financial Forum (Vol.7, No. 1)Publication Date: 2018-12-31
Authors : Pao-Peng Hsu Che-Yang Lin;
Page : 1-12
Keywords : Structural time series; Markov regime-switching process; HJM; European call option;
Abstract
We present closed-form formulas for the valuation of a European call option whose underlying process is assumed to follow structural time series and the Markov regime-switching process through mean reversion described by a harmonic oscillator. In our model, each parameter has related corresponding economic meaning, and this leads to an easy analysis of the interplay between the option and business cycles. Forward rates are assumed under the Heath et al. (1992) HJM framework. The call option analytic formulas are obtained when the joint distribution of occupation times is specified and forward rates are restricted in a one-factor HJM model.
Other Latest Articles
- Ring border and social will wind insurance tube such as he shadow ring Gold Merge machine construct financial b19> Performance Effect
- On risk and development trend of international financial market
- Comparison of stock market fluctuation spillover effects under the new and old international financial order Seedlings Clear
- A tentative exploration of the Practice, System and theoretical Base of "the International Finance"
- The spillover of the wave-bream in the inter-State financial market and its dynamic characteristics
Last modified: 2020-03-17 11:33:09