TY - JOUR T1 - Analytical Approximation Formula for Barrier Option Prices under the Regime-Switching Model JF - The Journal of Derivatives SP - 108 LP - 119 DO - 10.3905/jod.2019.1.088 VL - 27 IS - 2 AU - Xin-Jiang He AU - Song-Ping Zhu Y1 - 2019/11/29 UR - https://pm-research.com/content/27/2/108.abstract N2 - 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. ER -