Option pricing under a Markov modulated model using a cubic B-spline collocation method
by Geraldine Tour; Désiré Yannick Tangman
International Journal of Business Intelligence and Data Mining (IJBIDM), Vol. 9, No. 4, 2014

Abstract: In this paper, we consider the extension of the cubic B-spline collocation method to price path-dependent and exotic options when the price dynamics of the underlying asset are governed by a Markovian process. In this setting, the classical Black-Scholes model is generalised to incorporate Markov-switching (regime-switching) properties which account for the influence of economic factors on asset price dynamics. Our numerical results presented using the Black-Scholes two regime-switching model demonstrate that the cubic B-spline collocation method not only yields second order convergent prices and hedging parameters, but it is also more accurate when the problem is convectively dominated.

Online publication date: Fri, 10-Apr-2015

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

 
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Business Intelligence and Data Mining (IJBIDM):
Login with your Inderscience username and password:

Username:        Password:          Forgotten your password?

Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email subs@inderscience.com