Double Barrier Options in Regime-Switching Hyper-Exponential Jump-Diffusion Models

39 Pages Posted: 31 Jul 2009 Last revised: 10 Aug 2009

See all articles by Mitya Boyarchenko

Mitya Boyarchenko

University of Michigan - Department of Mathematics

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Date Written: July 28, 2009

Abstract

We present a fast and accurate algorithm for calculating prices of finite lived double barrier options with arbitrary terminal payoff functions under regime-switching hyper-exponential jump-diffusion models, which generalize Kou's model. Extensive numerical tests demonstrate excellent agreement of our results with those obtained using other methods. The first step of our approach is Carr's randomization, which we prove for barrier options under strong Markov processes of a wide class. The resulting sequence of perpetual option pricing problems is solved using an efficient iteration algorithm and the Wiener-Hopf factorization.

Keywords: Option pricing, double barrier options, double-no-touch options, Levy processes, Kou's model, hyper-exponential jump-diffusions, regime switching, stochastic volatility, stochastic interest rates, Carr's randomization, Canadization, analytic method of lines, Wiener-Hopf factorization

JEL Classification: C63, G13

Suggested Citation

Boyarchenko, Mitya and Boyarchenko, Svetlana I., Double Barrier Options in Regime-Switching Hyper-Exponential Jump-Diffusion Models (July 28, 2009). Available at SSRN: https://ssrn.com/abstract=1440332 or http://dx.doi.org/10.2139/ssrn.1440332

Mitya Boyarchenko (Contact Author)

University of Michigan - Department of Mathematics ( email )

530 Church Street
2074 East Hall
Ann Arbor, MI 48109
United States

Svetlana I. Boyarchenko

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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