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Pricing and hedging barrier options under a Markov-modulated double exponential jump diffusion-CIR model

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  • Chen, Son-Nan
  • Hsu, Pao-Peng

Abstract

A semi-closed-form valuation model is presented for barrier options whose underlying asset follows a mean-reverting and regime-switching double exponential jump diffusion process, and the interest rate is modulated by a mean-reverting square root model. The proposed model captures the impact of regime-switching uncertainty on barrier option prices and their hedge parameters in long and short business cycles. The model provides richer economic insight and is more appropriate for valuing barrier options in commodity markets as well as in equity and foreign-exchange markets, when an economy faces regime-switching uncertainty.

Suggested Citation

  • Chen, Son-Nan & Hsu, Pao-Peng, 2018. "Pricing and hedging barrier options under a Markov-modulated double exponential jump diffusion-CIR model," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 330-346.
    • Handle: RePEc:eee:reveco:v:56:y:2018:i:c:p:330-346
    DOI: 10.1016/j.iref.2017.11.003
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    Cited by:

    1. Li, Zhe & Zhang, Wei-Guo & Liu, Yong-Jun & Zhang, Yue, 2019. "Pricing discrete barrier options under jump-diffusion model with liquidity risk," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 347-368.
    2. Chuang, Ming-Che & Wen, Chin-Hsiang & Lin, Shih-Kuei, 2020. "Valuation and empirical analysis of currency options," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 71-91.

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