PT - JOURNAL ARTICLE
AU - He, Xin-Jiang
AU - Zhu, Song-Ping
TI - Analytical Approximation Formula for Barrier Option Prices under the Regime-Switching Model
AID - 10.3905/jod.2019.1.088
DP - 2019 Oct 24
TA - The Journal of Derivatives
PG - jod.2019.1.088
4099 - http://jod.pm-research.com/content/early/2019/10/24/jod.2019.1.088.short
4100 - http://jod.pm-research.com/content/early/2019/10/24/jod.2019.1.088.full
AB - In the article barrier options are analytically evaluated under the regime-switching model, with the volatility of the underlying price being allowed to jump between different states following a Markov chain. The target barrier option prices are expressed in a Fourier cosine series after a particular approximation formula is obtained. The accuracy and efficiency of the newly derived formula are demonstrated through numerical experiments, demonstrating the formula’s potential for practical applications.TOPICS: Analysis of individual factors/risk premia, factor-based models, optionsKey Findings• Barrier options are analytically evaluated under the regime-switching model.• This approximation formula is written in the form of a converged Fourier cosine series.• The formula is shown to be very accurate and efficient, and has a great potential to be applied in practice.