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Article: Pricing currency options under two-factor Markov-modulated stochastic volatility models

TitlePricing currency options under two-factor Markov-modulated stochastic volatility models
Authors
KeywordsCurrency options
Decomposition
Esscher transform
Regime switching
Two-factor stochastic volatility
Issue Date2008
PublisherElsevier 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?
AbstractThis 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 Identifierhttp://hdl.handle.net/10722/59870
ISSN
2015 Impact Factor: 1.378
2015 SCImago Journal Rankings: 1.000
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorSiu, TKen_HK
dc.contributor.authorYang, Hen_HK
dc.contributor.authorLau, JWen_HK
dc.date.accessioned2010-05-31T03:59:07Z-
dc.date.available2010-05-31T03:59:07Z-
dc.date.issued2008en_HK
dc.identifier.citationInsurance: Mathematics And Economics, 2008, v. 43 n. 3, p. 295-302en_HK
dc.identifier.issn0167-6687en_HK
dc.identifier.urihttp://hdl.handle.net/10722/59870-
dc.description.abstractThis 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.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/imeen_HK
dc.relation.ispartofInsurance: Mathematics and Economicsen_HK
dc.subjectCurrency optionsen_HK
dc.subjectDecompositionen_HK
dc.subjectEsscher transformen_HK
dc.subjectRegime switchingen_HK
dc.subjectTwo-factor stochastic volatilityen_HK
dc.titlePricing currency options under two-factor Markov-modulated stochastic volatility modelsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://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+Modelsen_HK
dc.identifier.emailYang, H: hlyang@hku.hken_HK
dc.identifier.authorityYang, H=rp00826en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.insmatheco.2008.05.002en_HK
dc.identifier.scopuseid_2-s2.0-56549111181en_HK
dc.identifier.hkuros159282en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-56549111181&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume43en_HK
dc.identifier.issue3en_HK
dc.identifier.spage295en_HK
dc.identifier.epage302en_HK
dc.identifier.isiWOS:000261920500003-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridSiu, TK=8655758200en_HK
dc.identifier.scopusauthoridYang, H=7406559537en_HK
dc.identifier.scopusauthoridLau, JW=16687049100en_HK

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