Explicit solutions to European options in a regime-switching economy

Authors

Rogemar S. Mamon, Brunel University
Marianito R. Rodrigo, Instituto Tecnológico Autónomo de MéxicoFollow

RIS ID

86647

Publication Details

Mamon, R. S. & Rodrigo, M. R. (2005). Explicit solutions to European options in a regime-switching economy. Operations Research Letters, 33 (6), 581-586.

Abstract

We provide closed-form solutions for European option values when the dynamics of both the short rate and volatility of the underlying price process are modulated by a continuous-time Markov chain with a finite number of "economic states". Extensions involving dividends, currencies and cost of carry are further explored.