%0 Journal Article
%A He, Xin-Jiang
%A Zhu, Song-Ping
%T Analytical Approximation Formula for Barrier Option Prices under the Regime-Switching Model
%D 2019
%R 10.3905/jod.2019.1.088
%J The Journal of Derivatives
%P 108-119
%V 27
%N 2
%X In this 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.
%U https://jod.pm-research.com/content/iijderiv/27/2/108.full.pdf