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Regime Switching and European Options

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Stochastic Theory and Control

Part of the book series: Lecture Notes in Control and Information Sciences ((LNCIS,volume 280))

Abstract

We consider a Black-Scholes market in which the underlying economy, as modelled by the parameters and volatility of the processes, switches between a finite number of states. The switching is modelled by a hidden Markov chain. European options are priced and a Black-Scholes equation obtained.

This work was partially supported by the Social Sciences and Humanities Research Council of Canada.

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References

  1. Barone-Adesi, G. and Whaley, R. (1987) Efficient analytic approximation of American option values, J. Finance 42, 301–320.

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Author information

Authors and Affiliations

  1. Deloitte-Touche, Houston, Texas, USA

    John Buffington

  2. University of Calgary, Calgary, Canada

    Robert J. Elliott

Authors
  1. John Buffington
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  2. Robert J. Elliott
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Editor information

Editors and Affiliations

  1. Dep. of Mathematics, University of Kansas, 405 Snow Hall, Lawrence, KS, 66045, USA

    Bozenna Pasik-Duncan

Additional information

For Tyrone Duncan on his 60th birthday

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© 2002 Springer-Verlag Berlin Heidelberg

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Buffington, J., Elliott, R.J. (2002). Regime Switching and European Options. In: Pasik-Duncan, B. (eds) Stochastic Theory and Control. Lecture Notes in Control and Information Sciences, vol 280. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-48022-6_5

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  • DOI: https://doi.org/10.1007/3-540-48022-6_5

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  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-540-43777-2

  • Online ISBN: 978-3-540-48022-8

  • eBook Packages: Springer Book Archive

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