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Fourier Transform Methods for Regime-Switching Jump-Diffusions and the Pricing of Forward Starting Options

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  • Alessandro Ramponi

Abstract

In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework.

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  • Alessandro Ramponi, 2011. "Fourier Transform Methods for Regime-Switching Jump-Diffusions and the Pricing of Forward Starting Options," Papers 1105.4567, arXiv.org.
    • Handle: RePEc:arx:papers:1105.4567
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    1. Giuseppe Di Graziano & L. C. G. Rogers, 2009. "Equity with Markov-modulated dividends," Quantitative Finance, Taylor & Francis Journals, vol. 9(1), pages 19-26.
    2. Friedrich Hubalek & Jan Kallsen & Leszek Krawczyk, 2006. "Variance-optimal hedging for processes with stationary independent increments," Papers math/0607112, arXiv.org.
    3. Biagini, Francesca & Bregman, Yuliya & Meyer-Brandis, Thilo, 2008. "Pricing of catastrophe insurance options written on a loss index with reestimation," Insurance: Mathematics and Economics, Elsevier, vol. 43(2), pages 214-222, October.
    4. Ernst Eberlein & Kathrin Glau & Antonis Papapantoleon, 2010. "Analysis of Fourier Transform Valuation Formulas and Applications," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(3), pages 211-240.
    5. Daniel Dufresne & Jose Garrido & Manuel Morales, 2009. "Fourier Inversion Formulas in Option Pricing and Insurance," Methodology and Computing in Applied Probability, Springer, vol. 11(3), pages 359-383, September.
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    Cited by:

    1. Yu Yang & Yonghong Wu & Benchawan Wiwatanapataphee, 2020. "Time-consistent mean–variance asset-liability management in a regime-switching jump-diffusion market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(4), pages 401-427, December.
    2. J. Lars Kirkby & Duy Nguyen, 2020. "Efficient Asian option pricing under regime switching jump diffusions and stochastic volatility models," Annals of Finance, Springer, vol. 16(3), pages 307-351, September.
    3. F. Antonelli & A. Ramponi & S. Scarlatti, 2016. "Random Time Forward-Starting Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(08), pages 1-25, December.
    4. Cui, Zhenyu & Kirkby, J. Lars & Nguyen, Duy, 2017. "Equity-linked annuity pricing with cliquet-style guarantees in regime-switching and stochastic volatility models with jumps," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 46-62.
    5. Alessandro Ramponi, 2016. "On a Transform Method for the Efficient Computation of Conditional V@R (and V@R) with Application to Loss Models with Jumps and Stochastic Volatility," Methodology and Computing in Applied Probability, Springer, vol. 18(2), pages 575-596, June.
    6. Alessandro Ramponi, 2022. "Spread Option Pricing in Regime-Switching Jump Diffusion Models," Mathematics, MDPI, vol. 10(9), pages 1-15, May.

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