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- Publisher Website: 10.1016/j.insmatheco.2008.05.002
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Article: Pricing currency options under two-factor Markov-modulated stochastic volatility models
Title | Pricing currency options under two-factor Markov-modulated stochastic volatility models |
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Authors | |
Keywords | Currency options Decomposition Esscher transform Regime switching Two-factor stochastic volatility |
Issue Date | 2008 |
Publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ime |
Citation | Insurance: Mathematics And Economics, 2008, v. 43 n. 3, p. 295-302 How to Cite? |
Abstract | This article investigates the valuation of currency options when the dynamic of the spot Foreign Exchange (FX) rate is governed by a two-factor Markov-modulated stochastic volatility model, with the first stochastic volatility component driven by a lognormal diffusion process and the second independent stochastic volatility component driven by a continuous-time finite-state Markov chain model. The states of the Markov chain can be interpreted as the states of an economy. We employ the regime-switching Esscher transform to determine a martingale pricing measure for valuing currency options under the incomplete market setting. We consider the valuation of the European-style and American-style currency options. In the case of American options, we provide a decomposition result for the American option price into the sum of its European counterpart and the early exercise premium. Numerical results are included. © 2008 Elsevier B.V. All rights reserved. |
Persistent Identifier | http://hdl.handle.net/10722/59870 |
ISSN | 2023 Impact Factor: 1.9 2023 SCImago Journal Rankings: 1.113 |
ISI Accession Number ID | |
References |
DC Field | Value | Language |
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dc.contributor.author | Siu, TK | en_HK |
dc.contributor.author | Yang, H | en_HK |
dc.contributor.author | Lau, JW | en_HK |
dc.date.accessioned | 2010-05-31T03:59:07Z | - |
dc.date.available | 2010-05-31T03:59:07Z | - |
dc.date.issued | 2008 | en_HK |
dc.identifier.citation | Insurance: Mathematics And Economics, 2008, v. 43 n. 3, p. 295-302 | en_HK |
dc.identifier.issn | 0167-6687 | en_HK |
dc.identifier.uri | http://hdl.handle.net/10722/59870 | - |
dc.description.abstract | This article investigates the valuation of currency options when the dynamic of the spot Foreign Exchange (FX) rate is governed by a two-factor Markov-modulated stochastic volatility model, with the first stochastic volatility component driven by a lognormal diffusion process and the second independent stochastic volatility component driven by a continuous-time finite-state Markov chain model. The states of the Markov chain can be interpreted as the states of an economy. We employ the regime-switching Esscher transform to determine a martingale pricing measure for valuing currency options under the incomplete market setting. We consider the valuation of the European-style and American-style currency options. In the case of American options, we provide a decomposition result for the American option price into the sum of its European counterpart and the early exercise premium. Numerical results are included. © 2008 Elsevier B.V. All rights reserved. | en_HK |
dc.language | eng | en_HK |
dc.publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ime | en_HK |
dc.relation.ispartof | Insurance: Mathematics and Economics | en_HK |
dc.subject | Currency options | en_HK |
dc.subject | Decomposition | en_HK |
dc.subject | Esscher transform | en_HK |
dc.subject | Regime switching | en_HK |
dc.subject | Two-factor stochastic volatility | en_HK |
dc.title | Pricing currency options under two-factor Markov-modulated stochastic volatility models | en_HK |
dc.type | Article | en_HK |
dc.identifier.openurl | http://library.hku.hk:4550/resserv?sid=HKU:IR&issn=ISSN: 0167-6687&volume=43&spage=295&epage=302&date=2008&atitle=Pricing+Currency+Options+Under+Two-Factor+Markov-modulated+Stochastic+Volatility+Models | en_HK |
dc.identifier.email | Yang, H: hlyang@hku.hk | en_HK |
dc.identifier.authority | Yang, H=rp00826 | en_HK |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/j.insmatheco.2008.05.002 | en_HK |
dc.identifier.scopus | eid_2-s2.0-56549111181 | en_HK |
dc.identifier.hkuros | 159282 | en_HK |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-56549111181&selection=ref&src=s&origin=recordpage | en_HK |
dc.identifier.volume | 43 | en_HK |
dc.identifier.issue | 3 | en_HK |
dc.identifier.spage | 295 | en_HK |
dc.identifier.epage | 302 | en_HK |
dc.identifier.isi | WOS:000261920500003 | - |
dc.publisher.place | Netherlands | en_HK |
dc.identifier.scopusauthorid | Siu, TK=8655758200 | en_HK |
dc.identifier.scopusauthorid | Yang, H=7406559537 | en_HK |
dc.identifier.scopusauthorid | Lau, JW=16687049100 | en_HK |
dc.identifier.issnl | 0167-6687 | - |