147
Views
0
CrossRef citations to date
0
Altmetric
Articles

Pricing and hedging for correlation options with regime switching and common jump risk

, , &
Pages 6504-6524 | Received 19 Apr 2021, Accepted 14 Jan 2022, Published online: 27 Jan 2022

References

  • Alfeus, M., and E. Schlögl. 2019. On spread option pricing using two-dimensional fourier transform. International Journal of Theoretical and Applied Finance 22 (5):1950023–654. doi:10.1142/S0219024919500237.
  • Arai, T. 2005. An extension of mean-variance hedging to the discontinuous case. Finance and Stochastics 9 (1):129–39. doi:10.1007/s00780-004-0136-5.
  • Bakshi, G., and D. Madan. 2000. Spanning and derivative-security valuation. Journal of Financial Economics 55 (2):205–38. doi:10.1016/S0304-405X(99)00050-1.
  • Black, F., and M. Scholes. 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81 (3):637–59. doi:10.1086/260062.
  • Carr, P., and D. Madan. 1999. Option valuation using the fast Fourier transform. The Journal of Computational Finance 2 (4):61–73. doi:10.21314/JCF.1999.043.
  • Chen, S., M. Chiang, P. Hsu, and C. Li. 2014. Valuation of quanto options in a markovian regime-switching market: A markov-modulated gaussian Hjm model. Finance Research Letters 11 (2):161–72. doi:10.1016/j.frl.2013.09.002.
  • Cont, R., P. Tankov, and E. Voltchkova. 2007. Hedging with options in models with jumps. In Stochastic Analysis and Applications, eds. F. E. Benth, G. Di Nunno, T. Lindstrøm, B. Øksendal, and T. Zhang, Abel Symposia, vol 2, 197–217. Berlin, Heidelberg: Springer.
  • Deelstra, G., and M. Simon. 2017. Multivariate European option pricing in a Markov-modulated Le´ vy framework. Journal of Computational and Applied Mathematics 371:171–87.
  • Dempster, M., and S. Hong, 2002. Spread option valuation and the fast Fourier transform. In Mathematical Finance-Bachelier Congress 2000, ed. H. Geman, D. Madan, S. Pilska, and T. Vorst, 203–20. Berlin: Springer Finance.
  • Elliott, R. J., L. Aggoun, and J. B. Moore. 1994. Hidden Markov models: Estimation and control. Berlin: Springer.
  • Elliott, R. J., L. L. Chan, and T. K. Siu. 2005. Option pricing and Esscher transform under regime switching. Annals of Finance 1 (4):423–32. doi:10.1007/s10436-005-0013-z.
  • Fan, K., and R. Wang. 2017. Valuation of correlation options under a stochastic interest rate model with regime switching. Frontiers of Mathematics in China 12 (5):1113–30. doi:10.1007/s11464-017-0608-5.
  • Fan, K., Y. Shen, T. K. Siu, and R. Wang. 2014. Pricing foreign equity options with regime-switching. Economic Modelling 37:296–305. doi:10.1016/j.econmod.2013.11.009.
  • Föllmer, H., and D. Sondermann. 1986. Hedging of non-redundant contingent claims. In Contributions to mathematical economics, ed. W. Hildenbrand and A. Mas-Colell, 205–23. Amsterdam: North-Holland.
  • Guo, X. 2001. Information and option pricings. Quantitative Finance 1 (1):38–44. doi:10.1080/713665550.
  • Hamilton, J. D. 1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57 (2):357–84. doi:10.2307/1912559.
  • Jrgensen, P. 2007. Traffic light options. Journal of Banking and Finance 31 (12):3698–719.
  • Kokholm, T. 2009. Pricing of traffic light options and other hybrid products. International Journal of Theoretical and Applied Finance 12 (05):687–707. doi:10.1142/S0219024909005415.
  • Kokholm, T. 2016. Pricing and hedging of derivatives in contagious markets. Journal of Banking & Finance 66:19–34. doi:10.1016/j.jbankfin.2016.01.012.
  • Kou, S. G. 2002. A jump diffusion model for option pricing. Management Science 48 (8):1086–101. doi:10.1287/mnsc.48.8.1086.166.
  • Liao, J., H. Shu, and C. Wei. 2017. Pricing power options with a generalized jump-diffusion. Communications in Statistics - Theory and Methods 46 (22):11026–46. doi:10.1080/03610926.2016.1257138.
  • Lyu, J., Y. Ma, and W. Sun. 2020. A unified option pricing model with Markov regimeswitching double stochastic volatility, stochastic interest rate and jumps. Communications in Statistics - Theory and Methods:1–12. doi:10.1080/03610926.2020.1833221.
  • Ma, Y., K. Shrestha, and W. Xu. 2017. Pricing vulnerable options with jump clustering. Journal of Futures Markets 37 (12):1155–78. doi:10.1002/fut.21843.
  • Merton, R. C. 1976. Option pricing when underlying stock returns are discontinuous. Journal of Financial Economics 3 (1–2):125–44. doi:10.1016/0304-405X(76)90022-2.
  • Mitra, S. 2015. Efficient option risk measurement with reduced model risk. Insurance: Mathematics and Economics 72:163–74.
  • Niu, H., and D. Wang. 2016. Pricing vulnerable options with correlated jump-diffusion processes depending on various states of the economy. Quantitative Finance 16 (7):1129–45. doi:10.1080/14697688.2015.1090623.
  • Qian, L., H. Yang, and R. Wang. 2011. Locally risk-minimizing hedging strategies for unit-linked life insurance contracts under a regime switching Le´ vy model. Frontiers of Mathematics in China 6 (6):1185–202.
  • Qian, L., Z. Jin, W. Wang, and L. Chen. 2018. Pricing dynamic fund protections for a hyper-exponential jump diffusion process. Communications in Statistics - Theory and Methods 47 (1):210–21. doi:10.1080/03610926.2017.1301475.
  • Schweizer, M. 1988. Hedging of options in a general semimartingale model. Ph.D. thesis, ETH, Zurich, Switzerland.
  • Shen, Y., and T. K. Siu. 2013. Longevity bond pricing under stochastic interest rate and mortality with regime-switching. Insurance: Mathematics and Economics 52 (1):114–23. doi:10.1016/j.insmatheco.2012.11.006.
  • Shen, Y., and Y. Zeng. 2015. Optimal investment-reinsurance strategy for mean-variance insurers with square-root factor process. Insurance: Mathematics and Economics 62:118–37.
  • Su, X., W. Wang, and H. Kyo-Shin. 2012. Risk-minimizing option pricing under a Markov-modulated jump-diffusion model with stochastic volatility. Statistics & Probability Letters 82 (10):1777–85. doi:10.1016/j.spl.2012.05.026.
  • Tankov, P. 2011. Pricing and hedging in exponential Le´ vy models: Review of recent results. Paris-Princeton Lectures on Mathematical Finance 2010:319–59.
  • Vandaele, N., and M. Vanmaele. 2008. A locally risk-minimizing hedging strategy for unit-linked life insurance contracts in a Le´ vy process financial market. Insurance: Mathematics and Economics 42:1128–37.
  • Wang, W., Z. Jin, L. Qian, and X. Su. 2016. Local risk minimization for vulnerable European contingent claims on nontradable assets under regime switching models. Stochastic Analysis and Applications 34 (4):662–78. doi:10.1080/07362994.2016.1166061.
  • Wang, X. 2016. Pricing power exchange options with correlated jump risk. Finance Research Letters 19:90–7. doi:10.1016/j.frl.2016.06.009.
  • Xing, Y., Y. Xu, and H. Niu. 2021. Equilibrium valuation of currency options under a discontinuous model with co-jumps. Probability in the Engineering and Informational Sciences 35 (3):432–50. doi:10.1017/S0269964819000500.
  • Yoon, J. H., B.-G. Jang, and K.-H. Roh. 2011. An analytic valuation method for multivariate contingent claims with regime-switching volatilities. Operations Research Letters 39 (3):180–7. doi:10.1016/j.orl.2011.02.010.

Reprints and Corporate Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

To request a reprint or corporate permissions for this article, please click on the relevant link below:

Academic Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

Obtain permissions instantly via Rightslink by clicking on the button below:

If you are unable to obtain permissions via Rightslink, please complete and submit this Permissions form. For more information, please visit our Permissions help page.