http://dx.doi.org/10.1007/s11464-010-0089-2">
 

Document Type

Journal Article

Department/Unit

Department of Mathematics

Title

Numerical methods for backward Markov chain driven Black-Scholes option pricing

Language

English

Abstract

The drift, the risk-free interest rate, and the volatility change over time horizon in realistic financial world. These frustrations break the necessary assumptions in the Black-Scholes model (BSM) in which all parameters are assumed to be constant. To better model the real markets, a modified BSM is proposed for numerically evaluating options price-changeable parameters are allowed through the backward Markov regime switching. The method of fundamental solutions (MFS) is applied to solve the modified model and price a given option. A series of numerical simulations are provided to illustrate the effect of the changing market on option pricing. © 2010 Higher Education Press and Springer-Verlag Berlin Heidelberg.

Keywords

American option, backward Markov regime switching, European option, free boundary problem, method of fundamental solutions (MFS)

Publication Date

2011

Source Publication Title

Frontiers of Mathematics in China

Volume

6

Issue

1

Start Page

17

End Page

33

Publisher

Springer Verlag

ISSN (print)

16733452

ISSN (electronic)

16733576

This document is currently not available here.

Share

COinS