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Abstract
In this paper, the valuation of European option is investigated when the discrete dividends are described by Markov-modulated Merton jump-diffusion process. According to the dividend discount theory, we regard the stock price as the net present value of all future dividends. The regime switching Esscher transform is applied to determine a risk-neutral measure. The closed form solution of European option is obtained under the condition that the dividend payments are announced in advance. Numerical simulations for the European call option prices are provided.
Acknowledgments
The authors are grateful to the anonymous referees and editors for the valuable comments that significantly improve this paper.
Additional information
Funding
This work was supported by the National Natural Science Foundation of China (62073071), the Fundamental Research Funds for the Central Universities and Graduate Student Innovation Fund of Donghua University(CUSF-DH-D-2021045), Startup Foundation for Introducing Talent of Anhui Polytechnic University (2020YQQ064), and Pre-Research National Natural Science Foundation of China of Anhui Polytechnic University (Xjky2020131).