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Valuation of chooser options with state-dependent risks

Author

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  • Lian, Yu-Min
  • Chen, Jun-Home

Abstract

In this study, the underlying stock price dynamics and the forward interest rate processes are, respectively, driven by a Markovian regime-switching jump-diffusion model and a state-dependent Heath-Jarrow-Morton model. Furthermore, we employ the regime-switching Esscher transform to identify a risk-neutral martingale measure, which is used to derive integral expressions on prices of European-style chooser options. Eventually, numerical examples are provided and discussed.

Suggested Citation

  • Lian, Yu-Min & Chen, Jun-Home, 2023. "Valuation of chooser options with state-dependent risks," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007036
    DOI: 10.1016/j.frl.2022.103527
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    References listed on IDEAS

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    16. Lian, Yu-Min & Chen, Jun-Home, 2021. "Pricing virtual currency-linked derivatives with time-inhomogeneity," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 424-439.
    17. Chen, Son-Nan & Chiang, Mi-Hsiu & Hsu, Pao-Peng & Li, Chang-Yi, 2014. "Valuation of quanto options in a Markovian regime-switching market: A Markov-modulated Gaussian HJM model," Finance Research Letters, Elsevier, vol. 11(2), pages 161-172.
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    1. Yuanchuang Shan & Huisheng Shu & Haoran Yi, 2023. "Pricing Equity-Indexed Annuities under a Stochastic Dividend Model," Mathematics, MDPI, vol. 11(3), pages 1-12, January.

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    More about this item

    Keywords

    Markovian regime-switching jump-diffusion model; State-dependent Heath-Jarrow-Morton model; Markov chain; Regime-switching Esscher transform; Chooser option;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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